Foundation Diploma in

Purchasing and Supply

Developing Contracts in

Purchasing and Supply

L4-02

Senior Assessor’s Report

Nov 2008

LE

VE

L 4

L4-02 SA report/Nov 2008 1

INFORMATION FOR CANDIDATES The senior assessor’s report is written in order to provide candidates with feedback relating to the examination. It is designed as a tool for candidates – for both those who have sat the examination and those who wish to use it as part of their revision for future examinations. Candidates are advised to refer to the Examination Techniques Guide (see the following link http://www.cips.org/documents/ExaminationtechniquesguideFeb07.pdf) as well as this senior assessor’s report. The senior assessor’s report aims to provide the following information:

• An indication of how to approach the examination question • An indication of the points the answer should include and how marks are

allocated

• An indication of candidate performance for the examination question APPENDIX A matrix for the examination is included as an appendix. It highlights the learning objectives of the unit content that each question is testing. The unit content guides are available to download at the following link: http://www.cips.org/studyandqualify/cipsqualifications/awardscontent/default.aspx ADDITIONAL SOURCES OF INFORMATION The Supply Management magazine is a useful source of information and candidates are advised to include it in their reading during their study. Please see the following link to the Supply Management website http://www.supplymanagement.com/

L4-02/SA report/Nov 2008 2

SECTION A Question 1 (a) (15 Marks) Discuss the legal position of St. Emilion Hotel in this business deal. This question tested candidates’ ability to analyse the stages in the development of the contract that the case study organisation has gone through, and summarise its legal position. Candidates were required to discuss the legal position of the St. Emilion Hotel (SH), but some mention of the role of Westminster Weavers (WW) was also required. Each aspect correctly identified and discussed, could gain two or three marks and exceptionally, four or five marks for consideration of more complex aspects. There is no specific “right” answer to this question, but it was expected that certain points be discussed and key areas included in the answer, some of these are detailed below: Although there was no ‘signed’ document covering the terms of the deal, the following occurred:

o numerous discussions between SH and WW o some plans and designs submitted o some unclear, but estimated pricing o an instruction from SH that the work should start o an acceptance that WW were allowed to start work o the fact that WW were permitted to complete the work

All of the above points, would support the assertion that there was a legally binding, verbal contract. There could be recourse in statute law available to St. Emilion Hotel, such as Sale of Goods and the Sale of Goods and Services Acts, in view of the fact that the carpet was not fit for purpose and poorly installed. In addition, where it was considered that Westminster Weavers’ note formed part of the contract, some of the provisions might be deemed unreasonable under the Unfair Contract Terms Act. Most candidates identified the key issue of whether offer and acceptance existed in this particular case. There was emphasis on the key fact that Rex Harrison of St. Emilion Hotel, did give acceptance by his conduct, through verbally instructing Westminster Weavers to commence work and allowing them access to carry out and complete the job. Some weaknesses in the answers included:

• repeating case study material, rather than reviewing the facts in order to make a judgement or showing positive reasoning on the legal situation

• incorrect statements claiming that because there was no formal signature, a contract did not exist

L4-02/SA report/Nov 2008 3

• incorrect conclusions that only a letter of intent or gentleman’s agreement existed • failure to explain SH’s potential recourse under statute law • focusing on just one point i.e. whether there was a contract or not, rather than

considering other points, such as implied terms, exclusion clauses • misreading the question and explaining what should be done to resolve the

situation, rather than stating the legal position. Question 1 (b) (10 Marks) Explain how St Emilion Hotel could attempt to resolve the situation in the short term. This question tested candidates’ ability to explain a legal position and make appropriate legal and commercial recommendations to one party in a dispute, in order to achieve resolution in the short term. Candidates were expected to give explanations of the legal and commercial position of St Emilion Hotel in this deal, with recommended ways of achieving a short-term resolution. The key words here are “short term”, suggestions that could take many months or years, such as litigation or arbitration, could only be awarded a limited number of marks. Two or three practical suggestions were sufficient to gain higher marks. These might have included:

• negotiation • use of the small claims procedure • paying less than the invoiced price, on a ‘quantum meruit’ basis • recourse to solutions under statute law • professional inspection of the work, as a way of establishing the extent of St

Emilion Hotel’s ‘loss’ • employing a different contractor to remedy the mistakes in the work.

Higher marks were gained for more detailed explanations, for better justification of proposals, for feasibility/practicability from a strictly commercial viewpoint and for precise application to the case study. Although there were some good answers which looked at several of the potential solutions given above, only a few candidates went beyond arranging a meeting and carrying out negotiation as a short term solution. Some did not specify what should be negotiated or how the negotiation should be carried out, and included a generalised discussion of terms and conditions. Other candidates included long term solutions such as arbitration or litigation, which did not meet the requirements of the question.

L4-02/SA report/Nov 2008 4

Question 2 (25 Marks) Explain FIVE improvements to the procedures for developing contracts at SH that the Board of Directors might want to introduce. This question tested candidates’ skills in proposing improvements to procedures for developing contracts, within the circumstances of the case study. The question gave candidates plenty of scope to identify and explain FIVE improvements to the procurement procedures operating within the organisation such as:

• identifying the need • writing the specifications • selecting and evaluating potential suppliers • appraising supplier’s financial and technical capabilities • formal tendering • getting the correct terms and conditions to apply to the deal • establishing financial and payment controls and due diligence • managing delegated authority for expenditure from board level downwards • proper contract management and contractor supervision • obtaining appropriate professional advice before entering into deals.

Up to five marks could be gained for each improvement identified and explained, higher marks could be achieved for detailed suggestions that are based on ‘case-study’ evidence. Fewer marks were gained for ‘generic’ suggestions that were not based on the case study. Other weaknesses included:

• poor structure e.g. no clear separation between the 5 points • extensive discussion about documents rather than contractual procedures,

particularly unnecessarily detailed analysis of the terms and conditions • answering the questions as a lessons learnt exercise, rather than as an

improvement proposal • heavy reliance on reference to the “Five Rights” of purchasing • solutions too complex for the size of company in the case study, such as full-time

lawyers and large procurement sections.

L4-02/SA report/Nov 2008 5

SECTION B Question 3 (25 Marks) Describe FIVE circumstances under which an offer, once made, may cease to exist. This question tested candidates’ knowledge of contract law, specifically the circumstances around the ending of ‘offers’. Candidates were required to describe five accepted ways in which offers cease to exist, which include:

• on acceptance • on death of offeror, if an individual • on liquidation of the offeror, if a company • after a “reasonable” time, if no time is specified • on expiry, if the offer contained a specific expiry date/time • on receipt of a counter-offer • on withdrawal by the offeror • on rejection by the offeree.

Up to five marks could be gained for each reason described, higher marks were achieved by offering better and more comprehensive descriptions, with examples of relevant precedent case law. Most candidates listed and described the ways in which offers cease to exist, but some candidates misread the question and included what is required to form a contract such as offer and acceptance, often with lengthy definitions; others discussed termination of a contract not an offer. Further marks could have been gained by greater use of examples and appropriate case law. Question 4 (a) (10 Marks) Describe TWO types of specification. This question tested candidates’ knowledge of the types and forms of specifications. There are three types of specifications but as candidates may have studied them under different names; all descriptors are wholly acceptable. These are: Technical (or ‘Input’, or ‘Conformance’, etc) Specifications are the rigid, very ‘specific’, description of all that the supplier must do and provide; they are common in engineering, defence, construction and pharmaceuticals. Functional Specifications are the looser specifications which give generic descriptions only, such as ‘baked beans’, ‘window cleaning’, ‘office maintenance’ etc.

L4-02/SA report/Nov 2008 6

‘Output’ or ‘Outcome’ or ‘Performance’ specifications are those which describe only what should ‘happen’ as a result of awarding and delivering the contract, but which do not commit the supplier as to what they have to do in order to achieve that desired result. Up to five marks could be gained for each of the two types of specifications described, with higher marks achieved for better and more comprehensive descriptions of what each type’s strengths and weaknesses are. The majority of candidates correctly described Conformance and Performance Specifications. Many gave good examples and described issues, such as who bears the risk in the event of failure of the specification and discussions of advantages and disadvantages of each type. Some candidates spent too long defining what a specification was, but generally the answers were of a good, and occasionally of distinction, standard. Question 4 (b) (15 Marks) Explain when, and why, Purchasing and Supply specialists should be involved in the preparation of specifications This question tested candidates’ knowledge of the role of purchasing and supply pertaining to the best ways in which specifications can be prepared; and how this early involvement can improve wider aspects of the ways in which organisations define their operational and strategic needs. Candidates were expected to explain that early involvement of procurement will lead to a better specification in that it would:

• generate good response from a competitive market • reduce the risk of intellectual property infringement • be clear and concise • provide good criteria against which to evaluate bidders

A few candidates did not answer the ‘when’ part of the question and many candidates appeared to misread it and gave a generic answer about why Purchasing and Supply specialists should be involved in a full procurement exercise rather than specifically in the preparation of specifications. Other answers tended to stray into what other disciplines could contribute, such as engineers and designers. In addition, some candidates failed to realise that this question carried more marks than question 4 (a), by writing much shorter, often superficial answers. Question 5

(25 Marks) An organisation needs to secure emergency backup and data recovery services to recover essential data in the event of an Information technology (IT) systems

L4-02/SA report/Nov 2008 7

failure. Describe FIVE contractual terms that the organisation might develop with the potential supplier. This question tested candidates’ understanding of contractual terms and conditions in the context of rarely-needed services. The significant difficulties of contracting in these circumstances, concern the need to contract for the purchase of something that the organisation does not need to buy within any identifiable timeframe. Candidates were therefore expected to describe FIVE different contractual terms that could be appropriate for inclusion in such a contract. Higher marks were gained by responses that included detailed suggestions, which were based specifically on the scenario presented, with fewer marks achieved for ‘generic’ suggestions of terms that are not rooted in the circumstances presented. A wide interpretation of the word “term” was allowed and issues such as the following could have been covered:

• call-out/error fixing response times • holding of strategic spares • confidentiality • security • payment periods • consequential loss • staff competence

This was not a popular or especially well-answered question. Although some candidates referred to requirements specific to the question, many gave generic answers based on theory of particular conditions (such as Liquidated Damages, Retention of Title) and did not relate their answers to the specific scenario stated in the question. Some candidates also spent a long time unnecessarily defining what a condition was and others relied heavily on vague assertions for the need for KPIs. Question 6 (25 Marks) Contrast the stages of a traditional tendering process with an electronic tendering process. This question tested candidates’ knowledge and understanding of e-tendering processes. Candidates were required to identify and describe the stages of a tendering process and clarify what would be different, and how it would be different, when conducting such a tendering exercise ‘electronically’. Better answers discussed the advantages and disadvantages of e-tendering when compared to ‘paper’ tendering with full contrasting analyses achieving the highest marks. Points covered could have included:

L4-02/SA report/Nov 2008 8

• relative time taken in the process for sending and receiving tenders electronically or by post

• differing process costs • the ability to carry out tender assessment more quickly on line • the automatic creation of an audit trail in electronic tendering • potential resistance of internal stakeholders and the supply chain, to electronic

tenders There were some instances of poor structure, where candidates did not clearly explain the various tendering process stages or did not carry out a true comparison. There was also occasional confusion between e-tendering and e-auctions, as well as some candidates believing that EU procurement regulations applied to all companies. General Comments There were a number of good responses, with a few at distinction level, with many candidates demonstrating a reasonable understanding of the subject. Common areas where the opportunity to gain marks was lost were:

• answers having a poor structure, with either no clear basis of argument or where a number of points was asked for, no clear separation between them

• excessive use of generic answers to questions, when there should have been clear references to a case study

• answers often too short, with not enough detail, examples or case law, where appropriate

• poorly planned work; • misreading the question.

L4-02/SA report/Nov 2008 9

APPENDIX: Matrix indicating the learning objectives of the unit content that each question is testing

Question No.Learning Objective a b c a b c a b c a b c a b c a b c

11.1 X1.21.3 X1.41.52

2.1 X X2.2 X2.32.43

3.13.23.33.43.5 X3.63.74

4.14.24.3 X4.4 X

Letting contracts

5 6

Contractual terms

2 3 41

Develop commercial agreements

The formation of contracts

SECTION BSECTION A

L4-02/SA report/Nov 2008 10