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Lecture 10

The document outlines the concept of contracts, defining them as legally enforceable agreements that establish obligations between parties. It distinguishes between agreements and contracts, detailing the key elements required for a valid contract, such as offer, acceptance, consideration, mutual consent, legal capacity, and legality of purpose. Additionally, it describes various types of contracts, including fixed-price, cost-reimbursable, time and materials, and others, while also outlining the contract management lifecycle from initiation to amendment.

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3 views

Lecture 10

The document outlines the concept of contracts, defining them as legally enforceable agreements that establish obligations between parties. It distinguishes between agreements and contracts, detailing the key elements required for a valid contract, such as offer, acceptance, consideration, mutual consent, legal capacity, and legality of purpose. Additionally, it describes various types of contracts, including fixed-price, cost-reimbursable, time and materials, and others, while also outlining the contract management lifecycle from initiation to amendment.

Uploaded by

ishtiaque ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Strategic Procurement in SCM

MBA(36-D)-Open (A)
Course Code: BA 5266
Week-10
Contracts
What is a Contract?
• A contract is a legally enforceable promise or set of promises.
• Contracts are legally binding agreements between two or more parties that
outline obligations, rights, and responsibilities.
• If one party fails to fulfill their promise (breaches the contract), the law provides
remedies to the other party.

Agreement: A mutual understanding or arrangement between two or more


parties about their rights and obligations does not necessarily have legal
enforceability.
• Use "agreement" for informal or non-binding arrangements.
• Use "contract" when the terms are legally enforceable.
Contracts
Relationship Between the Two
• All contracts are agreements, but not all agreements are contracts.
- An agreement becomes a contract only if it meets legal requirements
(consideration, lawful purpose).
Key Differences
Aspect Agreement Contract
Legally Binding Not always enforceable by law. Always legally enforceable.
Usually formal and written (some
Formality Can be informal (verbal or written).
exceptions, like verbal contracts).
Requires offer, acceptance,
Requirements Mutual consent is sufficient. consideration, legality, and
capacity.
No legal remedy (unless it’s a Breach leads to legal action
Consequences of Breach
contract). (damages, specific performance).
Key Elements of a Valid Contract
• Offer and Acceptance: One party makes an offer, and the other accepts it.
• Offer: One party present a proposal that outlines the terms and conditions
• Acceptance: The other party must accept the offer’s exact terms without
modifications.
• Counteroffer: If alterations are made in the offer, the result is a counteroffer
• Consideration: Something of legal value must be exchanged between the
parties (money, goods, services).
• Mutual Consent: All parties agree to the terms without coercion or fraud.
• Legal Capacity: Parties must be legally competent (not minors in most
cases, not mentally incapacitated).
• Legality of Purpose: The purpose of the contract must be lawful/ Legal.
Contract Types
1. Fixed-Price Contract (Lump Sum Contract)
A contract where the payment amount does not depend on resources
used or time expended.
• Firm Fixed Price (FFP)
• Fixed Price with Incentive Fee (FPIF)
• Fixed Price with Economic Price Adjustment (FPEPA)

Best for: Well-defined projects with clear scopes and deliverables.


Predictable costs, Risk for the seller if underestimated or project
overrun underestimation.
Contract Types
2. Cost-Reimbursable Contract (Cost-Plus Contract)
The buyer reimburses the seller for allowable costs and adds a fee
(profit).
• Cost Plus Fixed Fee (CPFF)
• Cost Plus Incentive Fee (CPIF)
• Cost Plus Award Fee (CPAF)

Best for: Projects with high uncertainty or evolving scopes.


Flexible scope of work changes, Higher risk and less budget certainty
for the buyer.
Contract Types
3. Time and Materials (T&M) Contract
A hybrid between fixed-price and cost-reimbursable contracts. Buyer
pays for time spent and materials used.
Best for: Short-term projects or work that’s not well-defined up front.
Flexibility in execution, Cost can increase rapidly if not managed
carefully.

3. Unit Price Contract


Payment is based on agreed-upon unit rates (e.g., per square foot, per hour).
Best for: Construction and services where quantities may vary.
Scales with actual quantities, Final cost may be uncertain until project ends.
Contract Types
5. Bilateral and Unilateral Contracts
• Bilateral: Both parties exchange promises.
• Unilateral: One party makes a promise in exchange for a performance

6. Implied and Express Contracts


• Express: Terms are clearly stated (written or spoken).
• Implied: Terms are assumed based on actions or circumstances

7. Adhesion Contracts
• A “take-it-or-leave-it” contract drafted by one party with no room for negotiation
(common in insurance or software agreements).

8. Option Contracts
• Gives one party the option to enter a contract within a specified time frame (often
used in real estate or futures).
Contract Conduct Process
The contract conduct process, also known as the contract management
lifecycle, is the process of creating, implementing, and reviewing contracts.
1. Pre-award
 Contract Request / Initiation
 Contract Authoring / Drafting
2. Award
 Negotiation and Review
 Approval and Execution
3. Management and/or development
 Obligation Management / Performance Monitoring
4. End of the contract lifecycle
 Amendment / Change Management
Assignment-2

• List down the contract management cycle steps and explain each
step, and discuss the importance of each stage for effective contract
management.

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