Procurement terms: C

Cabotage laws are passed by national governments and express the terms on which carriers may carry passengers, goods or materials within their borders of jurisdiction. Originally only referring to shipping, this term now also refers to other modes of transportation including aviation, railways and road transport.

Competence, capability and capacity are often used interchangeably to describe an individual’s or organisation’s ability to perform tasks or activities effectively. The term ‘capability’ is increasingly used to describe the combination of an organisation’s expertise and its capacity to execute specific strategies. Most organisations need the capability to manage service providers; the way they try to achieve that capability is to develop the competence (ability to perform tasks or activities effectively) of individual business managers. When there is a critical mass of competent managers the organisation may have the capacity to sustain that capability. See also Capacity and Competence.

In law, capacity refers to the ability of an individual to understand the facts of a situation, evaluate the alternative options and the implications of each course of action, make an informed choice and communicate their decision. Minors and those impaired by illness or inebriation may not have capacity to make choices on their own behalf and so cannot legally enter into agreements on their own. Capacity also refers to the attribute of an organisation to meet a particular challenge. If the organisation needs to cut its external spend by 10%, but most of the managers are competent in cost control but not cost reduction, then the organisation does not have the capacity to achieve its goal. See also Capability, and Competence.

Refer to Expenditure, Capital

Refer to Equipment, Capital

Generally used as shorthand for ‘carbon emissions’. Greenhouse gases, including carbon dioxide (CO2) and methane, contain carbon and contribute to global warming. The temperature of the Earth depends on a balance between incoming energy from the Sun and the energy that bounces back into space. Carbon dioxide particles in the air absorb heat that would otherwise be lost to space. Some of this energy is re-emitted back to Earth, causing additional heating of the planet. Many organisations are trying to reduce their carbon footprint in order to reduce emissions of greenhouse gases, of which carbon dioxide is the main gas. See also Carbon Footprint and Greenhouse Gases. .

A carbon credit is a generic term for any tradable certificate representing the right of a producer to emit one tonne of carbon dioxide or the equivalent mass of any other greenhouse gas. Carbon credits and carbon markets are a component of worldwide attempts to limit the growth in carbon dioxide emissions and other sources of greenhouse gases. See also Carbon.

The carbon footprint is the total greenhouse gas emissions caused by an organisation, event, product or person. Greenhouse gases can be emitted during supply; transport, manufacturing, production and use/consumption of goods as well as during activities like land clearing and coal mining. Organisations commission an emissions assessment in order to assess their carbon footprint so that a strategy can be developed to reduce it by, for example, alternative processes or managing demand. For procurement practitioners the implication is that we need to understand the carbon footprint of our supply chain and our suppliers, not just our own organisation’s carbon footprint. See also Carbon and Greenhouse Gases.

Also known as having a ‘net zero carbon footprint’, this term refers to a process or organisation with a net zero carbon emissions position. This would normally be the result of reducing the amount of carbon created in the first place and then seeking to balance the measured amounts of carbon created, with initiatives to remove the equivalent amount of carbon from the environment. This may include the use of renewable energy, carbon offset or purchase of carbon credits. See also Carbon, Carbon Credit and Carbon Offset.

A carbon offset is a credit for negating or reducing the impact of emitting a tonne of carbon dioxide by paying someone else to absorb or avoid the release of a tonne of CO2 somewhere else. Carbon offsets are measured in metric tonnes and one carbon offset represents the reduction of one metric tonne of carbon dioxide or its equivalent in other greenhouse gases. Offsets usually involve financial support for projects that reduce the emission of greenhouse gases in the short- or long-term, such as wind farms, tree planting or hydroelectric dams. See also Carbon and Greenhouse Gases.

Signatories to the Kyoto Protocol have pledged to reduce carbon emissions in order to mitigate the effects of future climate change. Producers of greenhouse gases pay for the energy they use, but do not pay the economic implications of future climate change, which will be paid by future generations. Carbon taxes and carbon trading aim to ensure carbon emitters pay the ‘true’ cost of their actions today. Under a tax, emitters are incentivised to reduce their carbon footprint, as the more carbon they produce, the more tax they pay. Under a trading scheme, emitters are granted a permit to produce a certain amount of carbon, and if they reduce their emissions below that cap, they can trade their permit for their unused emissions. If they produce too much carbon, they need to but carbon credits via the trading system from those with unused credits. See also Carbon and Greenhouse Gases.

Refer to Stock

An illegal association of producers bringing to market the same or similar categories who cooperate with each other to influence the market. While they may appear to be competing with each other, their actions such as fixing prices, restricting output, dividing markets or rigging tender bids are based on self-interest. See also Collusion.

A grouping of related goods or services based on similar characteristics. For example, packaging as a category may include a variety of different goods and materials, all of which share a common purpose. Each category may be further divided into sub-categories based on physical characteristics, such as plastic packaging, or cardboard packaging. Categories are often part of a hierarchy of classification, sometimes called taxonomy, though one of the most widely used, the UNSPSC does not use the term category. See also UNSPSC.

A prerequisite to category management is a full understanding of the category in terms of the attributes of demand for the category and the supply market for the category. Category analysis is broader than spend analysis, as the scope is both external and internal. It seeks to develop a comprehensive understanding of the stakeholders, demand profile, supply chain, suppliers and supply market characteristics. See also Spend Analysis. Developing a Category Strategy and Implementing Category Strategy training is available at Academy of Procurement.

In the procurement area, the term can be used in two ways: as a description of the procurement process, or as a basis for organising the procurement team. As a description of the procurement process, category management involves applying the end-to-end procurement process to a specific range of goods or services. This involves all the pre-award processes such as category analysis and demand management, sourcing and contract negotiation, as well as the post-award processes such as performance management. As a basis for structuring procurement resources category management usually involves defining the need, sourcing the market, negotiating the contract and managing the providers after the award. In order to ‘scale the role’ so that different categories represent approximately equal challenge, three key factors are considered: the value of spend in each sub-category, the diversity of the sub-categories and the challenge in the supply markets. See also Category and Procurement.

Category Management Essentials and Masterclass - Category Management training is available at Academy of Procurement.

A professional responsible for overseeing the strategic sourcing and management of a specific category of goods or services within an organization

Centralisation is the process by which the activities of a business or organisation, especially planning and decision-making, are concentrated within a particular location and/or group, generally the head office. During the evolution of procurement there have been cyclical trends towards centralisation of procurement and then towards de-centralisation. Hybrid models have also emerged, such as federal or ‘CLAN’ structures. Centralisation can be effective in gaining control of the spend portfolio, helping promote consistent adoption of policy and procedures, allowing concentration of scarce procurement resources and offering a career progression for procurement practitioners. See also CLAN and Decentralisation.

A Certificate of Origin [CO] is a document certifying the place of growth and production or manufacture of goods. The CO identifies goods and includes certification by a government authority, or other empowered body, that the goods in question originate in a specific country. The certificate often includes the exporters and importer's details, the method of transport, port of origin and destination and a description of the goods with the country of origin listed. Customs authorities and bankers use the content of the document as part of international trade.

An Incoterm meaning ‘cost and freight’ and relevant only for transport entirely by water. The supplier pays the costs and freight to bring the goods to the port of destination, and the risk is transferred to the buyer once the goods are loaded on to the vessel. See also Incoterms.

Chaebols are large, family controlled South Korean business conglomerates, such as Samsung, Hyundai and LG. The word stems from chae meaning wealth or property and pol meaning faction or clan. Chaebols are global multinationals, typically owning numerous international enterprises. From a procurement perspective, both the chaebol and the Japanese keiretsu represent a form of vertical integration. Mutual share ownership between participants in the same supply chain changes the relationship between ‘buyer’ and ‘seller’, reducing the likelihood of opportunism and creating a framework for potential cooperation. See also Integration, Vertical and Keiretsu.

Change management is a structured approach to transitioning and aligning individuals, teams and organisations from a current position to a desired future state.  Most organisation-wide initiatives involve some level of change management aimed at helping employees to welcome, embrace and accept changes in policy, process, systems and/or behaviour.  Procurement ‘transformation’ projects are an example of projects with organisation-wide scope. The role and capability of the procurement function is changed through some permutation of changes in people, processes and technology, but for the potential benefits to be harvested, stakeholders need to change behaviours as well as the procurement team. See also Benefits.

A change order is the formal document through which a change is made to a construction contract, for example the scope of work or the completion date or the price of the work. Both parties agree to the change and the implications in terms of mutual rights and obligations.

An Incoterm meaning ‘cost, insurance and freight’ (to a named port of destination) used exclusively for maritime transport. The supplier pays the costs and freight to transport the goods to the port of destination and, in addition, arranges and pays for the insurance up to the point when the goods are loaded on the vessel. Risk passes to the buyer from that point onwards. See also Incoterms.

An Incoterm meaning ‘carriage and insurance paid’ (to a named place of destination). The supplier pays for carriage and insurance to the named destination, but risk passes to the buyer when the goods are handed over to the first carrier. See also Incoterms.

A claim is an unsolicited request for an additional payment or extension of time that is disputed by the other party, either because it has no basis in the contract or, because there is a difference in interpretation of the contract, or a disagreement about the facts supporting the claim. Claims contrast with variations that are a formal amendment to the terms and conditions or the scope of work which have been agreed by both parties. See also Variation.

Centre-Led Action Network [CLAN] is a model for organising procurement. The CLAN concept assumes a decentralised model, with procurement staff operating within the various business units of an organisation. The main reporting line for each of these staff members is to the team leader of the local business, with a dotted reporting line to a small procurement ‘centre’, usually located in the corporate Head Office. The central team sets standards, policy and direction, and coordinates activities in order to minimise duplication of effort, and maximise synergy between the business units. See also Structure, Federal.

Clarification is sought to make a clause or term in a proposal or tender offer clearer or better defined for all parties involved, in order to avoid any misunderstanding or incorrect/unfair assumption being made. Governance regimes that do not allow post-offer negotiation may allow clarification as long as the terms of the bidder’s offer are not changed. See also Negotiation.

One of the levels of classification in the United Nations Standard Products and Services Code [UNSPSC] hierarchy. The other levels of classification are Segment, Family, Commodity and Business Function (optional). As an example, Segment 44 is Office Equipment, Family 10 is Office Machines, Class 15 is Duplicating Machines and Commodity 01 is Photocopiers. See also UNSPSC.

The phrase ‘boilerplate clause’ refers to those terms within an agreement which are standard to many agreements and which are included within draft contracts as a means of reducing organisational risk. Such clauses usually cover legal issues rather than the specifics of individual agreements. Examples include a statement as to which court has jurisdiction over the agreement, a statement asserting that the contract reflects the entire agreement between the parties, a statement asserting that nothing in the behaviour of the parties will be construed as creating a partnership, and so on. When drafting contracts, care should be taken that any clauses ‘borrowed’ from another source are appropriate for the agreement for which they are intended. See also Terms and Conditions.

Refer to Equipment, Client Furnished

In contract management, the final stage of a project is the close out, involving all the administrative, legal and financial processes needed to bring the contract to an end. These processes include ensuring that the contractor has fulfilled their obligations, that all financial liabilities have been resolved, that the performance of the contractor has been recorded, that any outstanding claims have been identified, and that the rights and obligations of the parties in respect of ongoing liabilities such as latent defects have been recorded and executed as per the terms of the contract.

A code of conduct is a formal statement by an organisation of how it expects to behave to uphold its stated values, for example integrity and transparency. The code outlines the responsibilities of, or proper practices for, individuals, teams and the organisation itself. Codes of conduct typically address conduct in terms of principles, for example, behave honestly, treat all people with respect, disclose any conflict of interest, etc. In relation to procurement, there are usually explicit rules about accepting gifts and hospitality, to promote confidence in the objectivity and transparency of the procurement process. See also Probity.

Coding systems are used in procurement to identify stock items, categories and suppliers. Codes are the basis of electronic systems, and coding schemes like UNSPSC enable e-Commerce. There are two broad approaches to coding: significant and non-significant. The UNSPSC is a significant coding scheme in that the numbers in the code denote the item’s character. All like commodities share adjacent codes. Such coding schemes need to be carefully designed to ensure that they have sufficient entries. Non-significant coding schemes simply use the next available number and have no architectural constraints. See also UNSPSC.

Coercion is the practice of forcing another party to behave in an involuntary manner, by using threats of negative consequences, economic pressure, or an imbalance of bargaining power. In negotiation, coercion may be used as a form of leverage to induce the other party to behave in a certain way. The Commonwealth of Australia Competition and Consumer Act 2010, (formerly known as the Trade Practices Act 1974) includes provisions to limit the use of economic duress and unconscionable conduct, so care should be taken when using threats in negotiation. This is especially true when there is an imbalance in bargaining power, for example, where the buyer is large and the supplier is small, or when the buyer is a large share of the supplier’s total sales, so that the supplier has little alternative but to comply. See also Negotiation.

Secret agreement between two or more individuals or organisations to limit competition by the use of such methods as deception, misleading behaviour or fraudulent activity, where the objective is to obtain an unfair advantage. Collusion may take the form of a market sharing agreement, price fixing or bid rigging. Legally, all acts affected by collusion are considered to be void. See also Cartel.

Refers to data, details, or knowledge that, if disclosed to unauthorized parties, could potentially harm a company's competitive advantage, financial position, or market position

A venue for the exchange or trade of various commodities and their derivatives. Some commodity markets specialise in trade in specific commodities, such as the Chicago Mercantile Exchange that specialises in livestock and meat and, the London Metal Exchange, which specialises in metals. Traders may speculate on the difference between spot pricing and future prices.

A good that is supplied by many different producers and is considered to be equivalent by the market. One of the characteristics of a commodity is that its price is determined as a result of being actively traded by its market. Soft commodities are goods that are grown, for example coffee beans, wheat and sugar. Hard commodities are the goods that are extracted through processes such as mining, for example gold and crude oil. See also Category.

One of the five levels of classes in the United Nations Standard Products and Services Code [UNSPSC]. The other four levels of classification are Segment, Family, Class and Business Function (optional). The UNSPSC for any given item is therefore composed of either four or five two-digit identifiers, which together universally categorise the item. See also UNSPSC.

Competence is the combination of knowledge, skills and behaviour a jobholder deploys to perform a specific role satisfactorily. The concept of ‘core competence’ was adapted from the individual attribute of competence and applied organisations. See also Capability.

Competition is a contest between businesses that are striving for the client’s business. Organisations in business are usually in competition with others for customers, markets, materials and, of course, contracts. Most procurement governance schemes value competition between suppliers as a means of securing value. Many markets are not ‘free and open’ as there are barriers to entry or market distortions such as monopoly, and because market offerings are not homogenous. Similarly, the practice of inviting three quotes, bids, offers or tenders may not harness the available competition. See also Market Structures.

The Commonwealth Government Competition and Consumer Act 2010 superseded the Trade Practices Act 1974 and introduced revised obligations for suppliers and also revised competition law.  The object of the Act is to ‘enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection’.  See also Quality, Acceptable.

Any market that does not fit the ideal market profile of perfect competition. An imperfect market is characterised by, for instance, barriers to entry, small numbers of buyers and sellers, and non-homogeneity of products. Monopolies and oligopolies are considered examples of imperfect competition. Most markets, which procurement practitioners deal with, have multiple players, each offering slightly differentiated solutions, and no business has total control over the market price. See also Market, Distortion.

Refer to Bidding, Competitive

To be in compliance with a legal agreement or established standards, goods, services and/or processes are required to adhere to the specified requirements. As an example, a buyer may insist on adherence to codes of conduct in terms of the employment conditions of workers or the avoidance of other unsustainable practices. A compliance audit on suppliers or upstream in the supply chain may be conducted by the buyer or their agent to validate that agreed standards are being adhered to.

Compromise is one means of reaching agreement and involves mutual concessions. A common approach to negotiation is to ‘split the difference’ between the parties’ positions. Suppose the supplier has quoted $100 and the buyer has offered $90, any settlement between $90 and $100 involves compromise. The method is often seen as a last resort, as neither party gets what they wanted. However it can be seen as ‘fair’ as both parties concede; many buyers would believe that $95 is a fair solution in the example given. See also Negotiation.

When drafting contracts, the phrase ‘terms and conditions is often used to describe any term, but legally the terms of an agreement may be conditions or warranties. A condition is a term that goes to the root of the agreement, and breach of a condition may afford the injured party the right to terminate, as well as to claim damages. A warranty is an assurance given by one party that specific promises will be honoured; breaching a warranty affords only the right to claim damages. The distinction between conditions and warranties is not influenced by the way the contract is drafted, but rather results from the nature of the agreement. See also Terms and Conditions.

Conditioning refers to a practice where a supplier or vendor imposes certain terms, conditions, or requirements on the buyer as part of the procurement agreement or contract. These conditions are set by the supplier and are typically non-negotiable or may have limited room for negotiation.

In commercial relationships most parties seek to defuse or prevent conflict before disputes escalate to relationship breakdown and/or relationship termination. Common approaches to conflict resolution include prevention, such as socialisation and joint team building, negotiation, escalation and mediation. The term ‘conflict resolution’ is sometimes used interchangeably with the term ‘dispute resolution’. See also Alternative Dispute Resolution. Conflict Resolutions Skills training is available at Academy of Procurement.

For promises to be enforceable as a contract, each party to a contract must provide ‘consideration’, unless the agreement is a deed. In procurement, the buyer usually agrees to pay a sum of money - the price - in return for the supplier promising to perform the contract. The mutual exchange of benefits between the parties is one test to establish the existence of a legally binding contract. See also Contract, Bilateral.

Refer to Stock, Consignment

A carrier that specialises in the collection of small shipments from several sources and consolidates them into larger shipments for delivery to designated points, typically at a more cost-effective freight charge.

A consumable is a product that is used once and then discarded. For example, hypodermic syringes are single use. It is consumed by use and cannot be re-used. Any further economic value could only be derived from recycling for another purpose. See also Expendable.

A container is a large, sealed standard-sized boxes used to transport goods, primarily for intermodal and international shipping. Standard containers can be handled by shipping, rail and road transit operators and the benefits of their use include reductions to transit time, loss prevention, reduced packaging requirements, limit to potential damage whilst goods are in transit and reductions in the overall costs of transporting goods to markets. See also Bulk Freight, Full Container Load and Less than Container Load.

Provision made for use in the event of unexpected circumstances, which could lead to an extension in time or costs. Bidders may include contingencies in their offers for acceptance of risk, for potential delays or for unforeseen events. Customers may also allocate resources to a reserve for subsequent use and distribution if unexpected events occur. See also Risk.

Contingency planning is the preparation undertaken to deal effectively with an exceptional or unforeseen risk that is impossible to avoid. These plans are often devised by organisations that want to be prepared for events which may be highly unlikely, but which would have a major impact in the event of their occurrence. For example, the reliance on a single source could have major implications for business continuity in the event of disruption to supply. Disaster recovery and business continuity planning are related activities focused on developing foresight and allowing quick response. See also Disaster Recovery and Risk.

When parties decide to barter or exchange goods and/or services without cash changing hands, this is sometimes described as a ‘contra’ deal. Contra deals are typically informal domestic exchanges, as opposed to countertrade which is prevalent internationally, and which may allow parties to avoid accounting for the transactions. From a procurement perspective contra deals require careful management to ensure that the value of the goods and/or services exchanged is broadly equivalent and to manage the implications if a one-off transaction becomes reciprocal trade. See also Countertrade and Reciprocal Trade.

A contract can be written or verbal. It is an agreement between two or more parties to perform specific acts and is enforceable by law. The six prerequisites for a legally binding contract under Australian Law are: agreement (offer and acceptance); consideration (the payment of a sum of money etc.); capacity (being of legal age and sound mind to enter legal relations); intention (the parties to the contract intend to enter legal relations); formalities (representation in writing) and certainty. See also Terms and Conditions. Contract Management Essentials and Advanced Contract Management training is available at Academy of Procurement.

Structured teams or committees responsible for overseeing the management and execution of contracts within an organization

The process of effectively administering, implementing, and overseeing contracts throughout their entire lifecycle, from initial negotiation and agreement to contract closure

The specific key performance indicators (KPIs) or quantitative measurements used to assess and monitor the performance and effectiveness of procurement contracts

An individual or entity within an organization who is responsible for the management and oversight of a specific contract throughout its entire lifecycle

The agreed-upon amount that a buyer (usually the procuring organization) will pay to the seller (usually the vendor or supplier) for the goods, services, or works specified in the contract

The detailed description and specifications of the goods, services, or works to be provided by a supplier or contractor as outlined in the procurement contract

Procurement contracts can take many forms depending upon the duration of the agreement, the number of participants in the agreement, the pricing basis of the agreement and the scope of work. Legal Contracting e-Learning courses and Masterclass - Contract Law training is available at Academy of Procurement.

Most contracts in procurement are bilateral, or synallagmatic, contracts, where each party makes promises to the other. When both parties promise to do something, or refrain from doing something that they were not previously legally obligated to do, this leads to mutual consideration, a prerequisite for contract formation. For example, most buyers promise to pay if the seller performs the contract, i.e. each party makes a different promise to the other. See also Consideration.

A particular type of contract in which one party builds, owns, operates and maintains [BOOM] an asset on behalf of a customer. The benefits for the customer are that they can contract for and pay for, the output of the asset, rather than paying the construction cost upfront, as well as avoiding bearing the risk of poor construction control, poor capacity availability, and maintenance costs. As an example, the customer may award a contract for power generation to a contractor. The customer would pay only for the power supplied and the contractor would not only supply the asset, in this case design and build of a power station, but also assume responsibility for operating the asset. This changes the contract from supply of an asset to the provision of a service and the customer gains the benefit of the output of the power station, without the problems associated with operating and running the power station. See also Public Private Partnership.

A particular type of contract in which one party builds, owns, operates and transfers [BOOT] an asset to a customer. The benefit for the customer is that they can gain ultimate ownership of the asset and finance the asset by assigning economic rights to the contractor, who builds and operates the asset, for a finite period of time. As an example, a government may wish to build a new bridge across a river, but not have enough funds to pay for the bridge. Instead, it could award a contract to an operator to design, build and operate the bridge for a period of time, for example 25 years. During that time, the operator would have the right to levy a toll on bridge users who would not only pay for the bridge, but also earn the operator a profit. At the end of the period, the operator would transfer ownership of the bridge to the government, which could then continue the tolls, or make the bridge free, according to its circumstances. See also Public Private Partnership.

A contract traded on markets to exchange a specific amount of a commodity at an agreed future price and at an agreed future time. The party agreeing to buy the commodity is said to have a long position, while the seller has a short position. Forward contracts are similar to futures contracts in that both specify the exchange of goods for a specified price at a specified future date. However, a forward contract is not traded on an exchange and the subject of a forward contract is not standardised. Both approaches may be used in hedging, as these transactions allow speculators and purchasers to adopt an investment position intended to offset potential losses that may be incurred in the acquisition of the commodity. For example, a chocolate manufacturer may enter into a contract to buy cocoa to make chocolate. The contract is for 1000kg of cocoa to be delivered in three months time at a price of $1 per kg. In three months time the price of cocoa may be more or less than $1 per kg, exposing the manufacturer to risk, so they may hedge the purchase by agreeing to sell 1000 kg of cocoa for $1 per kg in three months time. If in three month’s time the spot price of cocoa is $2 per kg, the chocolate manufacturer will make a $1000 profit on their purchase of cocoa, as they can buy at $1 per kg rather than the spot price of $2 per kg. However, they have to buy 1000kg of cocoa on the open market at $2 per kg to fulfil their obligation to sell 1000kg of cocoa at $1 per kg, resulting in a loss of $1000; exactly what they made on the purchase. Similarly, if the spot price of cocoa is $0.50 per kg in three months time, the manufacturer will lose $500 on the purchase element of the hedge, but can buy cocoa at half the price it has agreed to sell at, making a profit of-$500. See also Hedging.

A hire contract is an agreement to allow the use of an asset for a period of time without ownership passing. The terms ‘hire’, ‘rent’ and even ‘lease’ are often used as synonyms, with the differences related to context. Typically equipment is hired on a short-term basis where the nature of demand does not warrant outright purchase. See also Leasing and Rental.

Open book contracts are arrangements where the contractor is reimbursed their actual expenses, which are validated through allowing the client access to the contractor’s actual expenditure, the ‘open book’. The contractor may be allowed a fee on top of the allowable expenses, either a fixed fee or a percentage of the expenses. Open book approaches are appropriate when it is hard to scope the work and not appropriate or possible to transfer the risk to the contractor. Accordingly, some clients incorporate an incentive in cost-reimbursable contracts, to promote cost-sensitive behaviour. Open book contracts require some trust between client and contractor, so that the contractor is confident that the client will accept allowable expenses and not use access to the contractors actual cost information to renegotiate the terms. See also Contract and Cost Plus.

Performance based contracts seek to focus upon the output required from the contractor, and create measures and remuneration mechanisms which align the contractor’s performance with the outcomes desired. This contrasts with traditional approaches in that the specifications focus less on the ‘how’ and more on the ‘what’ through a clear statement of expected work outcomes. The statement of work shows the detailed work elements including a performance standard, acceptable quality levels, how performance will be measured and monitored, and the percentage of the contract price each service represents. Performance based contracts require clear definition of what is needed and measurement processes which relate directly to actual performance levels. For example, supposing a buyer pays a maintenance provider for supporting a pump. The fees are 15% of the initial acquisition cost, and the fee is paid annually. The fee structure is unrelated to the actual cost expended by the supplier, and the supplier may or may not focus on achieving the required uptime levels - assuming that these are specified and measured. A performance-based contract might reward the provider for uptime, the provider will only be paid if the pump is functional, and the provider will be paid less - or not at all - if the pump reliability is less than specified. This would be a performance-based contract, and align the contractor to delivering the required pump availability. See also Risk and Reward. Intermediate Contract Management training is available at Academy of Procurement.

An approach to performance measurement and reporting for contracts that seeks to identify a variety of key dimensions and allow both parties to share a common understanding of progress and performance. The purpose of the scorecard is to align the parties in terms of what should be measured, how and by whom. The measures used include KPIs, financial performance and overall outcomes. See also Performance Regime.

Contracts may be terminated in a number of defined circumstances. First, the parties may have fulfilled their contractual obligations to each other and the contract is terminated by performance. Second, the parties may agree to terminate the contract by mutual agreement. In rare circumstances, the contract may be terminated by frustration, where one party cannot fulfil their obligations due to circumstances that could not reasonably have been foreseen and incorporated into the contract. Finally, contracts may be terminated if there is a breach of a fundamental condition of the contract. See also Contract. Contract Law Essentials training is available at Academy of Procurement.

A simple form of contract, appropriate when the work scope is not clearly defined. The contractor is remunerated on the basis of labour hours priced at an agreed rate, together with materials used to deliver the service, also priced at an agreed rate. For example, a plumber called out to fix a leaking tap would be on a time and materials contract as the scope of the work cannot easily be ascertained in advance. The work could range from taking five minutes for a simple repair or potentially involve replacing parts or even work to the connecting pipes. The time and materials contract is an efficient method for payment in these situations. See also Remuneration. .

Under a turnkey contract the contractor is not only responsible for the design and construction of the project, but also for commissioning. The client’s role in turnkey projects is more ‘hands off, as the contractor is responsible for the engineering, procurement and construction and delivers the completed project to the client, often for a fixed lump sum agreed at the tender stage. See also Engineer, Procure, Install and Commission.

A contract that is legally valid but which the courts will not enforce because it does not fulfill a prerequisite. For example, two parties may agree a contract for one party to purchase some land from the other party. As land contracts have to be evidenced in writing, if there is no written evidence of the contract, it will be unenforceable. It should be distinguished from a contract that is void, which means that the contract was not legally valid in the first place.

Contracts may be bilateral or unilateral. In the case of a bilateral contract, each of the parties makes a promise to the other party, while in the case of a unilateral contract; only one party to the contract makes a promise.

Under the traditional contracting model the client engages an architect to develop the design, or undertakes the task in-house, and then engages a contractor to build the design. Thus there will be a contract between the client and the architect and a contract between the client and the contractor, but not between the architect and the contractor. The approach contrasts with design and construct contracting and the use of a management contractor. See also Engineer, Procure, Commission, Operate and Maintain. Masterclass - Contract Management training is available at Academy of Procurement.

Any provision forming part of a contract is a contractual term and each term gives rise to a contractual obligation, the breach of which may give rise to the possibility of legal action. Although the phrase ‘terms and conditions’ is used colloquially to describe contractual terms, all express clauses may be terms, but not all terms may be conditions. Furthermore, there may be implied terms that are not expressly written in the contract but are enforceable. See also Representations, Pre-contractual.

Cooperation is the process of working or acting jointly towards a shared outcome and is the opposite of working in competition. Most organisations have a spectrum of supplier relationships and cooperate with a small number of key suppliers for mutual benefit. For example, the label ‘partner’ is sometimes given to suppliers who cooperate or collaborate significantly to the business, and the parties may create joint teams to work collaboratively on joint projects to reduce costs or design new solutions, products or processes. See also Partnership and Supplier Relationship Management.

Copyright is a subset of intellectual property law. A copyright is an exclusive right, granted by law, which prevents unauthorised reproductions of a wide range of works such as books, maps, sheet music, paintings, photographs, architectural and technical drawings, and computer programs. Copyright is automatic, meaning the work is protected as soon as it is recorded, but copyright does not protect ideas, concepts, styles, techniques or information. See also Intellectual Property. .

Corporate Social Responsibility [CSR] is the extension of corporate goals and decision making to include a broader range of concerns than simply organisational objectives and financial measures of performance. The objectives of CSR are sometimes known as the ‘triple bottom line’ or ‘people, planet and profit’. CSR promotes good corporate citizenship and responsibility for corporate actions, as well as encouraging a positive impact on all its stakeholders, including suppliers, consumers, employees, communities governments and the environment. CSR has clear implications for procurement in terms of adoption of sustainable practices, standards and specifications in the supply chain and consideration of the social impact of the organisation’s behaviours. See also Socially Responsible Procurement and Triple Bottom Line.

Corrective action is an improvement undertaken to a process to restore performance to the required standard. For example, if a service level agreement specifies a standard that 90% of travel requests are to be processed in 24 hours and the actual performance is that only 75% meet that standard, the client may request that the provider take corrective action to achieve the required standard. Corrective action involves exploring the root causes of the deficiency and initiating improvement, while preventative action seeks to avoid a recurrence. See also Service Level and Service Level Agreement.

Cost is the economic value that has been used to do something or create goods or services. There are many different measures of ‘cost’ in accounting but to non-accountants it generally refers to the full cost of production, including allocated overheads. The term has many applications in procurement. Suppliers incur costs in producing their goods or delivering their services and the supplier may calculate their price by adding on a margin to their cost. The true cost to the buyer includes not only the seller’s price, but also the acquisition cost of buying the goods or services, raising the order and paying the invoice. The total cost of the purchase may include the seller’s price, the acquisition costs of raising an order etc. and the lifetime cost of using the goods or receiving the service, including disposal and close out. See also Total Cost of Ownership. Cost Management e-Learning courses are available at Academy of Procurement.

The strategy of identifying and implementing measures that prevent or eliminate potential costs that could have been incurred without careful planning or decision-making. It involves taking proactive actions to avoid unnecessary expenses or mitigate financial risks

Many organisations seek to reduce their cost base and in this context the term refers to the nature and the sum of all the inputs to the business. For example, value-based airlines seek a lower cost base than full-service airlines and to do this they typically employ fewer staff, on more flexible contracts, operate in cheaper locations and specify standards that not only reduce the cost of their operations, but allow more flexibility in the event of an economic downturn. This affects procurement practices as they may outsource some processes to create a more flexible cost base and also lease rather than buy aircraft for the same reason. See also Cost Leadership.

Cost Benefit Analysis [CBA] is a systematic technique used to review and evaluate the benefits and costs of any given project for two purposes: first, to determine the feasibility of the investment, and second, to explore alternative options to achieve the same goal. The calculation involves comparing the total expected cost of each option against the total expected benefits, to determine whether the benefits outweigh the costs, and, if so, by how much. The role of procurement is to assist in validating that the total cost of each option is fully costed and that the benefits proposed are realistic in both scale and timing. See also Business Case.

Cost down refers to the practice of reducing cost in the supply chain through the review of actual costs and the adoption of new materials, standards, processes or behaviours to reduce cost. For example, a buyer may walk the supply chain with their supplier and identify opportunities to reduce the supplier’s costs by identifying low or non-value adding activities. Supposing the goods were wrapped in two layers of packaging on the despatch bay and the parties agreed that one layer of packaging would suffice. This would be a cost down initiative. See also Cost Out.

A description of the structural sources which influence the nature and level of costs incurred by business activity. For example, if we used to buy from two domestic sources and we now single-source from overseas, there are at least two cost drivers at play: the scale of our purchase and the distance over which the goods are shipped. Cost drivers are related to the value chain. Typical cost drivers include economies of scale, learning, supply chain linkages, vertical integration, location etc. See also Costing, Activity Based.

Cost leadership is a potential source of competitive advantage based on achieving the lowest cost of operation within an industry. Cost leadership can be driven by various factors such as the efficiency of a business, the business size, scope and scale, and the cumulative experience of its workforce. If there is a price war, the company with the lowest overall costs – the cost leader – will be able to make profits for the longest. See also Cost Base.

Cost of capital is a concept used in investment appraisal to evaluate new projects. It is the minimum return investors expect for providing capital to a company, therefore the return on capital from the project should be greater than the cost of the capital used to fund it. The source of the capital could be from debt, equity or a combination of these two.

Costs of goods sold [COGS] is an accounting concept describing those costs related to buying or making goods for resale by the business. COGS usually includes costs of materials, labour and allocated overhead.

Cost out refers to the practice of eliminating cost in the supply chain through the review of actual costs and the adoption of new processes or behaviours to eliminate cost. For example, a buyer may walk the supply chain with their supplier and identify opportunities to eliminate costs by pinpointing low or non-value adding activities and redesigning the process to eliminate them. Suppose goods are counted after being picked and then checked again on the loading bay prior to despatch. The parties might agree that the second check could be eliminated. This would be a cost-out initiative. See also Cost Down. .

Cost plus contracts are agreements where the contractor’s pricing is based on itemising allowable costs and then adding an agreed margin. Such pricing basis may be appropriate when there is uncertainty about the scope or nature of the work and the client is willing to accept a level of financial risk. The benefits of the approach include reduction in the contractor’s contingencies, but the contractor has no incentive to act in the most economic way, as the higher their costs, the more margin they make.

Cost to serve is an approach to customer accounting that calculates the true profitability of a customer, based on the total costs of supporting that customer. Just as different products have different cost structures, so customers may have different cost profiles. For example, Customer A may contract annually and arrange for 12 monthly drops against a delivery schedule updated quarterly. The customer has one decision maker who seeks technical support on average once every 90 days. Customer B may buy hand-to-mouth, with ad-hoc orders which are always ‘panic buys’ with short lead times, and have a total of 26 drops in the last 12 months. There are three technical officers who seek regular guidance and each seeks technical support at least once a month. Assuming that both customers purchase identical volumes, the ‘cost to serve’ of each customer will be very different. A pricing regime that is based on volumes will charge both the same price, while the real profitability of Customer A will be higher than that of Customer B. A ‘cost to serve’ approach would price the same product at a higher price to Customer B than to Customer A if the supplier wanted to achieve the same profitability. See also Service Level.

Suppliers or vendors who provide goods or services that offer the best value for money in relation to their quality, performance, and pricing

Various strategies, approaches, or actions that can be implemented to reduce the overall costs of acquiring goods, services, or works for an organization

In calculating the total cost of ownership, one element that should be included is the cost of raising a purchase order, receiving the category and the transaction costs of managing the payment process. These are collectively acquisition costs. They should be distinguished from the actual invoice value of the goods or services. Contemporary approaches seek to relate the acquisition cost to the value of the goods or services. For example, procurement cards may represent a lower cost way of acquiring certain goods or services rather than raising a purchase order and reconciling and paying a paper invoice. See also Total Cost of Ownership.

Costs that do not vary with production volume. Typical examples include plant, buildings and equipment. Faced with unpredictable levels of activity due to changing economic conditions, many organisations seek to reduce their fixed costs and convert fixed costs into more flexible or variable costs. Outsourcing and leasing are two procurement-related consequences. See also Asset and Expenditure, Capital.

Marginal cost is the cost of producing an additional unit of output. For example, supposing a supplier produces 100 units at a cost of $1000, and the cost of making 101 units is $1005. The average cost per unit is $10, but the marginal cost of the 101st unit is only $5. When negotiating with suppliers, buyers may seek to persuade the supplier to set a price that covers their marginal costs only, rather than adopt absorption costing. Absorption costing means that the product absorbs all of the variable costs and overheads. In the example above, a marginal costing argument might be used to suggest a price of $6 per unit, covering the supplier’s variable costs and making a contribution towards overheads and profit. See also Total Absorption Costing.

Opportunity cost is a way of measuring the cost of an activity in terms of the value of the best alternative that was not selected. For example, an existing supplier offers to maintain the current contracted price if the buyer agrees not to seek competitive offers at the conclusion of the current contractual period. In making the offer, the supplier also advises the buyer that market rates have increased by 5%, which the suppler is willing to forgo in return for the security of an extension to the period of the contract. However, the buyer decides that the transparency of inviting competitive bids for the renewal of the contract is preferable to making a potential saving of 5% by remaining with the current supplier. Tenders are invited and the original supplier wins the contract, but the buyer is required to pay 5% more than was previously being paid, as a result of the tendering process. The opportunity cost of going to tender has been an increase of 5% to the value of the contract, being the value the buyer chose to forgo in order to undertake the option of the competitive tendering process. The buyer decides that this a price worth paying, rather than facing accusations of a lack of transparency as a consequence of not going to tender.

Refer to Cost Plus

Costs which have a fixed and a variable component. The electricity bill of most offices has a fixed component that is related to the electricity connection and also a variable component that varies with actual consumption. Many labour costs are also semi-variable in that labour costs cannot easily be ‘turned off’ if activity levels fall.

Variable costs are expenses incurred in the business that change depending on the level of production. As an example, if I produce one picture frame, the variable costs will include my labour and the materials needed to make the picture frame. Fixed costs will include those costs that do not vary with the level of output, including rental of the premises where I make my picture frame. If I make two picture frames, the cost of labour and materials will increase proportionally, but the fixed costs will not change.

An approach to allocating overheads in which indirect costs are loaded or ‘absorbed’ into direct costs related to specific jobs, processes or outputs, using an estimated basis of allocation. See also Total Absorption Costing.

Activity-based costing is an alternative approach to the allocation of overheads that recognises that traditional approaches such as allocating a ‘standard’ percentage are inaccurate and lead to incorrect understanding of actual costs and profitability. As an example, let’s say two products each require one hour’s labour and the same material cost, but product A requires 60 minutes of processing by an expensive machine, whereas product B requires 6 minutes processing by the same machine. If the overhead apportionment is based on labour hours and a standard percentage is added, both products will be costed the same, and product B will subsidise product A. Under activity-based costing a cost driver will be used to apply the overhead cost of the expensive machine, for example, hours for processing, so that the true cost of product A - and hence its real profitability - will be measured. See also Cost Driver and Total Absorption Costing.

A counter offer is a conditional response to an offer made by the other party in a negotiation. If the seller offers to sell at a price of $100, and the buyer responds with ‘I will offer you $90!’, that is a counter offer. Legally, a counter offer destroys the original offer, so the buyer may subsequently say ‘OK, I will accept the offer of $100’, but the original offer is no longer capable of acceptance and the buyer’s comments are themselves an offer which the seller may choose to accept. See also Acceptance.

Countertrade involves paying for goods and services with consideration other than cash. There are three main types of countertrade. Barter is the direct exchange of goods or services for other goods or services. Buyback involves supplying capital equipment to a customer in return for a certain percentage of the output of the equipment as partial payment. Offset involves an agreement to purchase a specified amount of product from a particular country. For example, a government may award a contract to a contractor to make tanks with an offset obligation to place 20% of the contract’s value with contractors in that country. In theory, countertrade allows the buyer to create value in acquiring the countertrade ‘bargain’ and then create additional value on the resale of the countertrade ‘bargain’. In practice, many countertrade bargains are liquidated through countertrade intermediaries who specialise in countertrade, for example in Vienna. See also Barter, Buyback and Offset.

An Incoterm meaning ‘carriage paid to’ (named place of destination). The supplier pays the cost of carriage to a named destination and risk transfers to the buyer when the goods are handed over at that destination. Typically the recipient will be the carrier, rather than the buyer. See also Incoterms.

When evaluating offers, weighted factor analysis can be used to assess competing offers against a variety of criteria. A number of criteria are proposed, usually including cost, quality, time, service and other relevant factors, and each criterion is weighted with a relative weighting to value its importance in the decision-making process. Offers are then scored against the weighted criteria to identify the best value outcome overall. See also Evaluation.

Cross docking is the supply chain practice of unloading incoming materials and goods and immediately reloading onto outbound transport with little or no storage in between. Cross docking typically involves the consolidation of deliveries from multiple suppliers in order to deliver a variety of different suppliers’ products in a customised way to individual outlets.

Refer to Team, Cross Functional

Cultural differences can exist at a variety of levels: within organisations, between organisations and between nations. A practical definition of corporate culture is the values and behaviours that are shared by groups in an organisation and which influence the way they interact, both with each other and with others outside their organisation. National cultures also vary in many ways and the implication for procurement practitioners is that to build effective working relationships, we should recognise cultural differences, acknowledge the merits of alternative cultural patterns and adapt our behaviour appropriately. Positive Problem Solving training is available at Academy of Procurement.

Refer to Asset, Current

Refer to Liabilities, Current

The status of a customer when their supplier affords them privileges not widely available to other customers. Traditional purchasing concepts are predicated on the idea that suppliers are disposable and that it is the supplier’s privilege to receive orders from the customer. For example, the invitation of three bids assumes that there are three acceptable bidders, and the label ‘vendor’ assigns a common classification to all suppliers, irrespective of their significance to the buyer’s business. In markets where there are few suppliers, or where the balance of power lies with the suppliers, buyers may adopt an approach of projecting their organisation as a preferred customer. Simple procurement and contracting processes, on time payment, clear documentation, the avoidance of unduly onerous terms and conditions, ethical behaviour and transparent processes may help differentiate the buyer’s organisation from other buyers. The buyer is seeking preferential treatment, such as access to research and development, intellectual property, white papers or technology road maps, delayed implementation of price increases, avoidance of allocation rationing in times of shortage and preferential pricing. See also Allocation, Cost to Serve and Partner.

When customers demand a wide range of different products, the implications for manufacturers and supply chains is that there is a wide variety of variants made and held as inventory in the supply chain. In order to reduce inventories without compromising customer service, late customisation involves creating modular components from which a wide variety of final products may be made. For example, a computer manufacturer may make all of the key modules of a laptop computer, but instead of making the finished laptop for stock, it assembles the specific permutation of modules required by the customer only after the customer has placed their order. This requires short assembly periods, short lead times and modular design. See also Agility.

Cycle time is the time taken to complete a given process from start to finish. For example, some stakeholders perceive that the procurement process takes too long and ask for a reduction in the time taken to complete the end-to-end process. This is called cycle time compression, and if the cycle time is reduced, the throughput of the procurement team will also be increased.