In procurement, like many other activities, a large number of abbreviations and, particularly, specialist terms are used, the latter often with a considerable lack of consistency. Indeed, a number of different terms are used to describe the activity itself - 'purchasing and supply', 'procurement', 'materials management' and 'logistics'.
This glossary has been prepared to help you understand the terms used within procurement and those commonly found within contracts, terms and conditions. It is by no means a fully comprehensive listing and the definitions are not universal.
Acceptance of goods/services
As soon as goods/services have been delivered, any problems should be notified to the supplier immediately. Preferably this notification should be in writing and if verbal, confirmed in writing, immediately. The longer a delay in rejection the more difficult it will be to argue that your silence did not imply acceptance of the goods/services delivered.
Where, as part of the acceptance process, there is commissioning and acceptance testing, these should be completed within an agreed timescale and any problems notified, in writing. Only when the acceptance tests have been completed will the formal acceptance and hence the performance of the contract be complete.
Acceptance of offer
The unconditional acceptance of an offer forms the contract. It may be either oral, in writing or implied from conduct. Where the means of communication is instantaneous (ie face-to-face, telephone, fax or email) the contract will come into being when and where the acceptance is received. If it is posted it is deemed effective from the time of posting.
Advice notes/goods received notes
A supplier advising that a consignment of contracted goods has been dispatched issues a goods advice note. A goods received note (GRN) is issued by the buyer to acknowledge delivery but not necessarily acceptance of a consignment. (See note on Acceptance of goods and services)
A generic term for a legally-binding undertaking between the buyer and supplier, in terms of the obligations, relationships and responsibilities between them, that is commonly described as a contract. In it simplest form, an agreement can be verbal. The more usual approach is to make it in writing, using either a standard document (see purchase order) or a specifically prepared document (often described as a contract). Once an agreement has been made there is a commitment.
Also known as a trade list, eligible list or select list of potential suppliers. See supplier appraisal.
See supplier appraisal.
The nomination of an independent person or body within a contract to solve disputes is a more economic and quicker mechanism than the law courts and one that tends to attract less publicity. Arbitration is common in works contracts.
In law one party cannot unilaterally transfer or assign any if its liabilities or obligations under a contract but it may be able to assign its rights or some of them. One party can assign its liabilities and obligations to a third party but only if there is a trilateral agreement between the parties concerned. Such an agreement is called 'novation'. (not applicable in Scotland)
Some suppliers offer, or are required by the buyer, to provide at their own expense a promise from their bankers to underwrite any debt, default or failure of the supplier to perform its contract obligations.
May also be known as a tender, quote or quotation: a supplier's offer to provide goods or services for consideration, in response to the buyer's enquiry or invitation to quote/tender.
May also be known as bid (or tender) analysis, evaluation or assessment. The formal process of looking at suppliers' bids to identify which provides the best value for money. It may use various scoring techniques such as whole life costing to set out the components of the bids and compare them on a like-for-like basis. The outcome can be a ranking of the bids and a summary report that will assist the decision making process.
A process whereby suppliers' bids are scrutinised for conformity with the enquiry documents. Errors and omissions are rectified and other points clarified, so that like-for-like evaluation of the bids can be made. This process should be distinguished from post tender negotiation.
Bill of material
A list of materials, parts, components or sub-assemblies which comprise a product.
Bill of lading
Someone who wishes to move goods by sea can make a contract to have the goods carried on another person's ship. The bill of lading itself is a receipt to show the goods have been put on board, evidence of the terms of carriage and a document of title which can be used to transfer possession even if the goods are physically at sea.
The British Standards Institution. The national standards body in the UK, bringing together suppliers and users (including government) to draw up standards. These are numbered as identified by the prefix 'BS'.
Also known as call-off contracts. See standing arrangements.
Caveat emptor (let the buyer beware)
For an error to be operative and render a contract or term void, it must be an error of fact not an error of judgement. Thus if A buys an article from B for £100 when it is worth £50, the contract remains good. The buyer cannot complain of defects in goods of which he ought reasonably to have been aware in the circumstances.
Certificate of compliance
A certificate issued by a supplier which warrants that goods supplied meet the buyer's specified requirements.
Chartered Institute of Purchasing and Supply.
Action on the part of a buyer to review the contract file after completion of the work. The buyer ensures that all documents are up-to-date and that they properly reflect and record the detail of the exercise. While a record should be held of reasons for changes to, for example, tender specifications only the final versions should be retained on file. This will reduce confusion in the event of receiving a Freedom of Information enquiry.
A close-out report, reviewing the exercise, may be prepared and any lessons learnt summarised and shared with colleagues. This is also the ideal time to complete and file a vendor rating report on the supplier concerned.
The result of formalising an agreement by an act of acceptance. May also be used to describe the financial value of an agreement - the amount committed.
Awarding contracts by the process of seeking competing tenders. See also Market Testing.
Legal term used to describe the payment made for the goods or services provided by a supplier.
Stock items or lines held at the buyer's premises but owned by the supplier and not paid for until usage is replaced by the supplier. Alternatively, the supplier may hold the stock, at its own premises, for the buyer's exclusive use.
See Agreement. Often used to describe a standalone document to set out the terms of the agreement between buyer and supplier, prepared to include specific conditions rather than the general conditions used in a standard purchase order.
In government, used to describe testing the efficiency of in-house services against tenders from outside firms. Contracting out means placing a contract for such services with an outside supplier.
Contract award notice
Notice of award of contract published in the Official Journal of the European Union (OJEU) in fulfilment of requirements under the European Public Procurement Directives as implemented into UK legislation.
Notice published in the Official Journal of the European Union (OJEU) by contracting authorities inviting firms to tender in open, restricted or negotiated procedures under the European Public Procurement Directives as implemented into UK legislation.
Related not to the protection of ideas, but to the form in which they are presented (eg literary, dramatic, musical and artistic work, printed editions of books and computer programmes).
Cost insurance and freight (CIF)
The supplier's price includes all carriage-associated costs from dispatch to port of receipt. Title for the goods passes at the point when the goods pass the ship's rail.
Payment terms under which a supplier is reimbursed for actual (ascertained) costs plus an addition for profit - either an agreed fixed amount or a percentage of costs.
Critical path (analysis)
Most commonly used in works or major capital equipment projects. A sequence of defined activities whose timing determines the final completion date. See also Lead time. Critical path analysis is a management technique used to identify the interaction of these defined activities.
The term used to describe the process of explaining to unsuccessful tenderers why they have not been awarded the business and to help suppliers improve their competitive performance.
A collective name for all those tangible things that the supplier or contractor is required to supply under the agreement. It includes goods or finished works, together with drawings, specifications and other related documentation. It does not normally include intangibles such as warranties - these are commonly termed 'on-going obligations'.
In a voyage the obligation to see that the ship is loaded and unloaded falls to the charterer; the ship's owner's obligation being to get the ship to the port of loading or unloading. Demurrage is an agreed amount of damages to be paid by the charterer for exceeding the permitted amount of loading/unloading time. The quicker the total voyage time the more profitable is the transaction for the ship owner.
Economic order quantity (EOQ)
The most cost-effective quantity to order when purchasing for stock. See also Stock turn.
The actual user of the goods and services purchased by the buyer, responsible for stating the requirement and often the specification.
Also known as invitation to tender - the buyer invites suppliers to bid for business usually setting out the specification and terms and conditions. Enquiry documents comprise all those documents - specification, terms and conditions etc - sent to suppliers to enable them to bid.
Ex-gratia claims/ claims of right
Claims that are not covered by the contract are either
- 'claims of right' arising out of an action, or
- lack of action by one of the parties
which might give rise to a claim at law, or 'ex-gratia', where no payment is legally due under the contract or otherwise and which cannot be recovered at law.
An organised and sustained activity to monitor a supplier's progressive achievement with the aim of achieving deliveries on time.
The management, operation and maintenance, including all support services, of a complete installation. The term is often used where the responsibility is transferred to an external party.
Means by which a supplier obtains early and reliable payment of goods by discounting its invoices to a finance house that collects direct from the buyer at full value.
The purpose of a force majeure clause is to define circumstances that release the parties from liability. The clause itself defines the hazards, dangers or 'Acts of God' that have this effect.
Also known as standing agreements, standing arrangements, call-off agreements and call-off contracts. This is a form of 'enabling' agreement with a supplier, covering the terms and conditions (including price) for purchases under the agreement, usually arranged by some central point and under which the buyers 'call-off' to meet their requirements. Unless a specified quantity of supply over a given period has been committed, the arrangement only becomes a legally-binding contract when the call-off is made.
There are two types of framework agreement
- a single supplier where goods and services covered by the agreement are ordered as required, and
- a multiple supplier framework – with at least three (3) suppliers -where a mini-competition involving all the suppliers is completed each time there is a requirement.
Free alongside (FAS)
As it sounds the supplier's price includes all carriage costs from dispatch to the point where the goods are placed on the quay within reach of the ship being used for the onward transportation. Title passes once the goods reach that location.
Free issue material
Components, sub-assemblies or materials issued free of charge to a contractor by the buyer for incorporation in the final goods to be supplied to the buyer.
Free on board (FOB)
The supplier's price includes all carriage costs from dispatch to the point where they are loaded on board ship (or aircraft) for onward transportation. Title passes at the point when the goods pass the ship's rail.
Freight forwarding agency
An organisation appointed to carry out the transportation of goods from one point to another.
To render a contract null and void by showing that
- performance has become factually or legally impossible, or
- there has been some change of events so serious as to undermine the foundation of the contract such that to perform it, a different contract would have to be made.
However, it is narrow in scope and limited in application.
General Agreement on Tariffs and Trade.
International Standards Organisation. The international standards-making body whose standards are numbered with the prefix 'ISO'.
Invitation to tender/ request for quotation/ bid request
All commercial forms and documents including specifications, drawings, terms and conditions of purchase, tendering instructions, forms of tender and pricing schedules which comprise the buyers technical and commercial requirements, against which competing tenders/bids are assessed.
Invitation to Treat
A means of seeking information and inviting prospective offerors to make a contractual offer. A request for quotation or tender issued by a buyer is an invitation to treat. Price lists, catalogues etc are invitations to treat.
Intellectual property rights (IPR)
The legal rights relating to the ownership of inventions, designs, processes, techniques, drawings, specification, technical information and 'know-how', copyright, patents and trademarks are forms of IPR.
An approach to avoid holding stocks, primarily developed in manufacturing, involving the delivery of materials, parts, components etc, only at the time they are required for processing, assembly etc. It requires certainty as to suppliers' performance.
The period of time that is considered to be required between defined events - for example, between the placing of an order and the delivery of the goods. It is usually expressed as the number of working days or weeks. See also Critical Path.
Letter of credit
This is a mechanism of compromise between the buyer (who is interested in paying as late as possible and confirmation of the quality of goods) and the supplier (who is interested in early, guaranteed payment). It involves the buyer obtaining an undertaking (usually irrevocable) from its bank to pay the supplier when certain conditions are fulfilled. This credit is then notified to the supplier's nominated bank which may enable the supplier to finance the purchase of raw materials or the manufacture of the goods.
Letter of intent
A method by which the buyer advises a potential supplier of a future intention to place an order. Such letters (which may also be by fax or email) usually have an expiry date and often specify the conditions to be fulfilled before an order will be placed. They should be used with care, to avoid commitments being entered into prematurely or unintentionally.
A liquidated damages clause is a clause whereby the buyer makes a real attempt to estimate the loss likely to be incurred by a breach of contract. In which case the buyer may recover the amounts mentioned, no more, no less ie the liquidated damages clause must represent a genuine estimate of the damages.
Market testing: Contracting out
In government, used to describe testing the efficiency of in-house services against tenders from outside firms. It also has, of course, a more general meaning - testing the market for goods and services to tap the widest possible supplier base.
Materials coding and classification
Any system of uniquely identifying items in order to provide management information on purchasing and stockholding activity.
A term used to describe the purchasing and supply activity, primarily developed in a manufacturing context and with an emphasis on materials handling, stock control and distribution.
The grant of a limited monopoly in respect of a new registered invention capable of industrial application. It prevents anyone else making, using, disposing, importing or keeping any physical item which infringes it.
Post tender negotiation (PTN)
Discussions with a supplier or suppliers after their offers have been received, with the aim of achieving better value for money.
A process by which prospective suppliers are selected for a tender list. It involves their assessment judged against pre-set and objective technical, financial and commercial criteria.
Principals are the main parties to a contract. Agents or factors are people appointed by principals to make contracts on their behalf
Normally employed for high value capital-intensive contracts where the supplier requires pre-funding in order to maintain a positive cash flow during production. The contract sum is phased over the manufacturing period and preferably, payments are only released to the contractor on evidence of completion of a work stage.
Professional Indemnity insurance
Here the aim is to insure claims made by others whose persons, property or business have been affected by a wrong done by the professional staff of the insured company (relevant for architects, solicitors, accountants etc).
An invoice prepared before either commencement or completion of a contract to enable the buyer to obtain customs clearance for goods.
It also applies to any pre-payment for goods, not just, imported goods.
Public liability insurance
Is taken out by a business to cover against harm done to customers on the premises or by the product they are supplying.
Purchase order form
A pre-printed form used to enter into an agreement with a supplier and usually including the buyer's terms and conditions
Purchase requisition form
A pre-printed form usually completed by the end-user and budget holder, requesting the buyer to make a purchase and providing authority to commit expenditure.
All the equipment and procedures which a supplier employs to check, monitor and document factory processes or service activities to ensure and demonstrate that goods and services supplied conform to the buyer's requirements and published quality standards.
That part of the management systems, of both supplier and buyer, which is directed towards ensuring that goods or services will be fit for purpose. ISO9000 is the commonly derived standard for quality systems.
Another term for the offer from a supplier in response to the buyer's enquiry or invitation to tender.
Protects the appearance of mass produced products as long as it (ie the design) has a novel and aesthetic element and is not purely functional.
Rejection of goods/services
If goods are rejected, the a buyer possible solutions are
- To seek replacement goods or services that meet the product specification, and
- Damages, where the failure to supply acceptable goods or services has caused problems that cannot be solved by providing replacements.
Once goods have been accepted according to the Sale of Goods Act 1979, the buyer's only recourses are to
- Sue for damages for breach of contract, or
- Claim for contravention of statutory obligations, or
- Claim against any guarantee that is available.
The remedy of rejection is not available forever, however, acceptance cannot occur until the buyer has had a reasonable opportunity of examining the goods to check conformance.
A portion of the contract price, withheld by agreement between the parties for an agreed period of time after acceptance of goods until it can be demonstrated that they fully conform to specification when in daily use.
Rights of lien
The right of a creditor in possession of the goods of his debtor to retain possession of them until the price has been paid or debt completely satisfied.
Otherwise referred to as retention of title clauses - they ensure title and ownership of goods pass only on full payment of bills. The practical effect of such clauses is to place the supplier in a better position than the rest of the buyer's creditors in the event of the buyer's insolvency.
A discount on purchase price offered by a supplier to a buyer for prompt clearance of invoices.
A commercial organisation, public or private body, or individual offering to provide a service or supply goods with the legal capacity to contract to supply such goods or services.
The formal description in objective and measurable terms of the characteristics of the goods or services required. A 'performance' specification is one that focuses on the function of the product or service required: it builds the specification around a description of what is to be done rather than a fixed description of how it should be done. The latter is the approach used in a 'design' specification
The elimination of unessential differences between the end-users' requirements and available products, with the aim of moving towards the purchase of more readily-available goods and services. This can then enable a greater aggregation of demand, reduction of stockholdings etc. See also Variety reduction
The number of times the total stockholding of an item is used in a year, calculated by dividing the total annual usage by the average stockholding.
The situation where all stocks of an item have been exhausted.
Also known as supplier assessment or evaluation, or vendor appraisal/ assessment/evaluation. It is the process of establishing whether a supplier is capable in all key respects of providing the goods or services required. If firms are appraised for inclusion on approved lists (also known as trade lists or eligible lists) the process is called pre-qualification.
The formal offer to supply goods or services issued by a vendor, seller, supplier, manufacturer, agent, stockist or other organisation or person with legal capacity to do so. It is usually received in response to the buyer's invitation.
Third-party performance bonds
There is little point in attempting to recover damages from any supplier for poor performance if it lacks the ability to pay. Buyers should consider a 'guarantee of performance bond' whereby a third party undertakes, for a premium usually paid by the supplier, to carry the risk that the supplier may fail to fulfil its contract obligations (it can cover varying percentages of the contract value, even more than 100%).
Time is of the essence
What the buyer can do if the supplier does not meet the agreed deadline depends on whether the requirement to delivery on time is essential to the contract or not. In commercial contracts the assumption is that such dates are of crucial importance (ie conditions of contracts see warranties/conditions). However, there is always the danger of a court imposed exception to this general rule so it is safest to state that 'time is of the essence'.
See Approved list. The term may also be used to describe an index of suppliers prepared by a trade association or other body, sometimes on a subscription basis.
Most commonly used in the context of capital contracts, to describe an arrangement whereby the contractor provides everything required for full operation of the facility.
The breakdown of a price into its constituent cost elements (for example, labour, materials, administration, distribution, profit) to identify opportunities for reduction and/or a more cost-effective mix of resource inputs.
Value for money (VfM)
Defined as quality (or fitness for purpose) and delivery against price, judged on whole-life costs and not simply initial costs. In the purchasing initiative a VfM improvement is defined as a benefit generated by the procurement organisation's initiative and achieved by an action beyond that arising from mechanistic order-placing.
Variation of price (VOP)
Payment terms which provide for a change in price triggered by defined events - for example, an increase in the volume of sales above a defined level, or an increase in input costs as measured by a specified price index. Alternatively, a VOP clause may specify how any agreed change in the work to be done is to be priced.
Reduction in the numbers of types, sizes, grades etc of products purchased or held in stock. See also Standardisation.
A form of supplier appraisal: a technique that awards 'marks' for a supplier's actual performance on a contract against a list of significant factors, with the supplier's 'scores' on the various factors totalled to give a broad indicator of overall performance. Aspects of performance critical to the buyer may also be weighted to stress their importance.
Warranties/conditions (not applicable in Scotland)
It is important to distinguish between clauses that are fundamental to the contract and those that are less vital. The former (fundamental ie going to the heart of the contract) are conditions, the latter (less vital clauses) warranties. An injured party may repudiate the contract without further obligation in the case of a breach of condition. A breach of warranty is not repudiatory and the claimant must continue the contract and claim damages.