CPSM CPSM Contract Management & Negotiation 1 — Questions and Answers
Question 1: Which contract type places the greatest financial risk on the buyer?
- Firm-fixed-price
- Cost-plus-percentage-of-cost (Correct answer)
- Time-and-materials
- Fixed-price-incentive
Correct answer: Cost-plus-percentage-of-cost
Cost-plus-percentage-of-cost contracts incentivize the supplier to increase costs because their fee grows proportionally, placing maximum financial risk on the buyer.
Question 2: What is the primary purpose of a liquidated damages clause in a supply contract?
- To penalize suppliers for poor quality
- To pre-establish compensation for specific contract breaches such as late delivery (Correct answer)
- To limit the buyer's total liability
- To define warranty terms
Correct answer: To pre-establish compensation for specific contract breaches such as late delivery
Liquidated damages clauses pre-establish a specific, agreed-upon amount payable upon a defined breach (e.g., late delivery), avoiding costly litigation to prove actual damages.
Question 3: In CPSM negotiations, BATNA stands for:
- Best Alternative To a Negotiated Agreement (Correct answer)
- Baseline Assessment of Total Net Assets
- Budget Allocation To Negotiate Agreements
- Benchmark Analysis for Trade and Negotiation
Correct answer: Best Alternative To a Negotiated Agreement
BATNA (Best Alternative To a Negotiated Agreement) is the most advantageous course of action a party can take if negotiations fail, and knowing it strengthens a negotiator's position.
Question 4: Which contract clause protects a buyer when a supplier's costs rise due to unforeseen external economic events?
- Indemnification clause
- Economic price adjustment clause (Correct answer)
- Force majeure clause
- Termination for convenience clause
Correct answer: Economic price adjustment clause
An economic price adjustment (EPA) clause allows contract prices to be adjusted based on defined indices (e.g., PPI), protecting both parties from unforeseeable cost fluctuations.
Question 5: A supply manager discovers that a key contract contains no intellectual property (IP) ownership clause. What is the most significant risk?
- The supplier may charge higher prices
- The supplier could retain ownership of IP developed under the contract (Correct answer)
- The contract may be unenforceable
- Delivery timelines may be impacted
Correct answer: The supplier could retain ownership of IP developed under the contract
Without an explicit IP ownership clause, the supplier typically retains rights to any IP created during contract performance, potentially leaving the buyer without rights to use it.
Question 6: Which negotiation tactic involves deliberately starting with an extreme opening position to anchor the final outcome?
- Good cop/bad cop
- Anchoring (Correct answer)
- Nibbling
- Deadline pressure
Correct answer: Anchoring
Anchoring is a cognitive bias-based tactic where one party sets an extreme initial position that pulls the final agreement toward their preferred outcome.
CPSM CPSM Contract Management & Negotiation 1
Which contract type places the greatest financial risk on the buyer?