CPSM CPSM Contract Management & Negotiation 5 — Questions and Answers
Question 1: Which contract type places the GREATEST cost risk on the contractor/supplier?
- Cost-plus-fixed-fee (CPFF)
- Firm-fixed-price (FFP) (Correct answer)
- Cost-plus-incentive-fee (CPIF)
- Time-and-materials (T&M)
Correct answer: Firm-fixed-price (FFP)
Under a firm-fixed-price contract, the supplier bears all cost risk because the price does not adjust regardless of actual costs incurred.
Question 2: A buyer is negotiating with a sole-source supplier. Which strategy BEST improves the buyer's negotiating position?
- Offering a longer contract term in exchange for a price reduction
- Threatening to develop an alternate source or bring production in-house (Correct answer)
- Accepting the supplier's first offer to preserve the relationship
- Requesting a cost breakdown to use for external benchmarking only
Correct answer: Threatening to develop an alternate source or bring production in-house
Credibly threatening to develop competition or insource production shifts the balance of power by reducing the supplier's monopoly leverage.
Question 3: Under the parol evidence rule, extrinsic evidence of prior oral agreements is generally INADMISSIBLE to:
- Explain an ambiguous contract term
- Contradict or vary the terms of a fully integrated written contract (Correct answer)
- Demonstrate that the contract was induced by fraud
- Show that a condition precedent was not met
Correct answer: Contradict or vary the terms of a fully integrated written contract
The parol evidence rule bars use of prior oral or written negotiations to contradict or supplement an integrated written agreement, though exceptions exist for ambiguity, fraud, and conditions.
Question 4: A contract's indemnification clause states the supplier will hold the buyer harmless for 'any and all claims.' What risk should the buyer be aware of?
- The clause may expose the buyer to unlimited liability for the supplier's negligence
- Broad indemnification clauses are automatically unenforceable
- The clause may not protect the buyer against its own negligence in some jurisdictions (Correct answer)
- Indemnification clauses cannot be enforced without liquidated damages provisions
Correct answer: The clause may not protect the buyer against its own negligence in some jurisdictions
Many jurisdictions require explicit language to extend indemnification to the indemnitee's own negligence; vague 'any and all' clauses may not achieve this.
Question 5: When negotiating payment terms, a buyer negotiates Net 60 instead of the supplier's standard Net 30. What is the PRIMARY financial benefit to the buyer?
- Improved Days Payable Outstanding (DPO), conserving working capital longer (Correct answer)
- Reduced invoice processing costs
- Lower total contract price due to volume discount
- Better supplier credit rating improving supply chain risk
Correct answer: Improved Days Payable Outstanding (DPO), conserving working capital longer
Extended payment terms increase Days Payable Outstanding, allowing the buyer to retain cash longer and improve working capital and cash flow.
Question 6: A contract includes a 'limitation of liability' clause capping damages at the total contract value. Which type of damages would this clause MOST LIKELY be intended to exclude?
- Direct damages for defective goods
- Incidental damages for inspection costs
- Consequential damages such as lost profits (Correct answer)
- Liquidated damages pre-agreed in the contract
Correct answer: Consequential damages such as lost profits
Limitation of liability clauses are primarily designed to cap or exclude consequential damages, which can far exceed the contract value.
Question 7: In a multi-round negotiation, a buyer reveals its BATNA (Best Alternative to a Negotiated Agreement) to the supplier. What is the MOST LIKELY outcome?
- The supplier will lower its price to beat the BATNA
- The buyer weakens its negotiating position by exposing its reservation point (Correct answer)
- The supplier will immediately accept the buyer's last offer
- The buyer gains leverage by demonstrating market knowledge
Correct answer: The buyer weakens its negotiating position by exposing its reservation point
Disclosing your BATNA reveals your walk-away point, giving the supplier the ability to anchor offers just above it, weakening the buyer's position.
CPSM CPSM Contract Management & Negotiation 5
Which contract type places the GREATEST cost risk on the contractor/supplier?