Cisco
CompTIA
ISC
EC-Council
EXIN
Fortinet
ITIL
Juniper
Microsoft
VMware
Avaya
SAP
Google
NVIDIA
Salesforce
Amazon
Palo Alto Networks
ISC2
Splunk
ServiceNow
All Vendors
  2. Home
  3. Exams
  4. CIPS
  5. L4M3

CIPS L4M3 Exam
Commercial Contracting (Page 5 )

Updated On: 1-Feb-2026
Page 5 of 39
PDF with 189 Questions

Under a price adjustment agreement, which of the following would be supplier's justification for increasing unit price?

  1. Rise in fuel price
  2. Rise in economies of scale
  3. Rise in shares price
  4. Rise in customer's satisfaction

Answer(s): A

Explanation:

Normally in a price adjustment agreement, the supplier is allowed to change price based on an indexation, which is published by a third party (for example, government or exchange market). The selected indices often associate with input materials of supplier. For instance, the plastics manufacturer may adjust their price based on crude oil price as oil is major input of producing plastics. Other suppliers may select different set of indices, such as Producer Perception Index. In this question, only 'Rise in fuel price' could be a justification for supplier to increase price because:
- It may affect the input material price
- The index is checked and published by an independent third party.


Reference:

CIPS study guide page 179-184 LO 3, AC 3.3



An organization has a normal tender process that often last 1 month from defining the needs to contract award. Manufacturing department suddenly required a new special part that they could not foresee within a month.
Which of the following should be the priority actions of procurement manager in this urgent situation? Select TWO that apply:

  1. Design new specification
  2. Develop relationships with potential suppliers
  3. Review contract performance
  4. Get high-level authority approval
  5. Submit full business justification

Answer(s): E

Explanation:

This urgent needs occasionally occur due to a sudden change in circumstances. The process for selecting a replacement supplier must still be controlled. If there is a reason for normal processes to be waived, this must be fully documented and approved at a high level.


Reference:

CIPS study guide page 7 LO 1, AC 1.1



CMS Corp goes into a gainshare agreement with the contractor, EIP Ltd. Both parties agree that the final fee will be calculated on target cost - target fee basis.
Which of the following will affect the final fee payable in this gainshare agreement? Select TWO that apply:

  1. Accrual expense
  2. Final price
  3. Purchaser goodwill
  4. Supplier share
  5. Actual cost

Answer(s): D,E

Explanation:

An incentive contract is a sub-segment of a fixed-price or cost-reimbursement contract when there are specific cost or time commitments that are desired for a project. The standard incentive contract will allow for a fixed price to be paid for work to be completed by a specific deadline and at a specific cost.

There are two major types of incentive contracts: Cost-plus-incentive fee and Fixed-price incentive (firm target) contracts. Both types have the same formula for calculating final fee and final price. The target fee is the amount that will be paid if the actual costs (which can be proven) match the target costs
The actual fee will be adjusted in proportion to the difference between the target cost and the actual cost. The usual calculation is:
Target fee + ((target cost - actual cost) x Supplier share) = final fee The final price then becomes:
Actual cost + final fee = final price


Reference:

CIPS study guide page 185 LO 3, AC 3.3



Which of the following will be always automatically deemed as a consideration?

  1. Promise to perform over and above an existing obligation
  2. Promise given to a third party
  3. Implied consideration
  4. Past consideration

Answer(s): A

Explanation:

Consideration only appears in common law countries. Below are some examples of what is and what is not consideration:
- Past consideration is something that has already been done or given. This cannot act as consideration
- Implied consideration: if the detail of a promise to pay is expressed after the provision of goods or services, but there is an implication that such promise would be forthcoming, this may (depending on the facts) be valid consideration.
- A promise given to a third party: this is not normally consideration, and is based on a concept known as privity of contract. Anyone who is not a party to the contract, even if they are beneficiary of it, cannot sue if the terms of the contract are breached.
- A promise to perform over and above an existing obligation: This is always consideration


Reference:

- Consideration & Promissory Estoppel

- CIPS study guide page 36-40 LO 1, AC 1.2



Which of the following statement is true about insurance?

  1. An insurance policy can be mechanism of substance to back up indemnity
  2. The supplier must always pay the insurance premium for goods-in-transit
  3. An insurance policy transfers the legal liabilities from the insured to the insurer
  4. Professional indemnity insurance provides the insured business with financial protection against the liabilities caused by or arising out of the products supplied

Answer(s): A

Explanation:

An insurance policy transfers a risk from one party to another in exchange for payment, it does not transfer the liabilities from the insured to insurer.
Insurance policies are taken out as a form of protection against a specific risk or unfortunate occurrence. If one party indemnifies another to protect that other party in the event of a risk occurring then the indemnity itself is merely a statement of intent. There also need to be some mechanism of substance to back up that indemnity. This BACK UP is the insurance policy which can be relied upon to meet the indemnity being given. In fact, most indemnity provisions are backed up by insurance coverage.
Professional indemnity or liability insurance offers such coverage to professional advice or service providing individuals and companies ensuring protection against any legal costs and damages awarded as a result of claims relating to negligence.
Whereas more general forms of liability insurance focus on direct forms of harm such as sustaining injuries, professional indemnity insurance provides a far more detailed and comprehensive form of coverage. The cover protects a firm or individual's liability relating to any financial loss caused by errors or omissions in the service provided as well as any alleged failure to perform on behalf of a client. Goods in transit insurance does what it says on the tin, protecting any goods your business delivers or transports from place to place. The responsibility to pay the insurance premium is negotiable, it may belong to the supplier or the buyer.


Reference:

- Is that Covered? Insurance and Indemnity Clauses
- Professional Indemnity Insurance
- Goods in transit insurance
- CIPS study guide page 150-153 LO 3, AC 3.2



Viewing page 5 of 39
Viewing questions 21 - 25 out of 189 questions



Post your Comments and Discuss CIPS L4M3 exam prep with other Community members:

Join the L4M3 Discussion