Thursday, February 22, 2024
Thursday, February 22, 2024
HomeContract ManagementFramework Agreements: Suitability, Advantages & Limitations

Framework Agreements: Suitability, Advantages & Limitations

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There are different forms of agreements framed between the parties to define and fulfil obligations of the parties into the contract. Not every from of agreement is suitable for every situation, hence using suitable form of agreement as per the type of assignment is crucial for successful implementation of the assignments. EPC contract, item rate contract, lump- sum contract, turnkey contracts, performance based contract, time based contract, framework agreements, etc. are some of the forms of contracts used as per the project requirements. We will learn about the framework agreements in this blog post.

What are Framework Agreements?

Framework agreements are also called blanket purchase agreements, order agreements or master ordering agreements. There are basically two type of agreements, one is once-off agreement. This contract is executed only once and usually completes within a fixed period of time. On the contrary, some contracts run for continuous basis, without a fix time period. These contracts are called framework agreements. Framework agreements are the agreements between one of more buyers or suppliers, which basically define the terms and conditions of the contract, mainly with regard to price for a period of time. Other repetitive conditions such as place of delivery, etc. may be included in the contract while the quantity is not initially specified. The quantity of the product or service is ordered as per requirement at a price previously stipulated in the contract. These type of contracts are used for the procurement of commonly used, off-the-shelf goods, purchased on the basis of lowest price. Some example of these goods are office stationary, printing material, pharmaceutical supplies, etc.

Framework agreement is a fast way to procure goods, works and consultancy services. Sometimes a multi-supplier framework agreement is also prepared which enables the buyer to select from a number of firms to ensure that the procured goods or services provide the best value for money.

When the Framework Agreement is Suitable?

Framework agreements are suitable in the following circumstances:

(1) When the goods, services or works of the same specifications or requirements are ordered frequently.

(2) When the different entities of the same organization procure similar goods or services, and aggregating the demand could lead to volume discounts.

(3) Planning for emergency situations.

(4) No single firm is considered to have the sufficient capacity to fulfill the demand of purchaser.

Advantages of Framework Agreements

(1) The main advantage of framework agreements is that they save time and cost of sourcing process by avoiding the need to renegotiate terms and conditions again and again.

(2) These agreements are for the long term and hence help the parties to maintain good relationship with each other.

(3) Framework agreements enable both the buyer and seller, to work together and provide customize solution for the buyer.

(4) These type of agreements support the long term relationship with suppliers and thus help creating a sustainable environment which is good for investments as well as employment also.

(5) As the supplier understands the need of the purchaser and works for a longer time to fulfil that need, he/she gains expertise and this entire process results in cost saving and reduction of waste.

Limitations of Framework Agreement

(1) The framework agreements limit the competition and therefore the buyer has to take care that it is to be used only in the situations where the other benefits such as cost saving and customized solution outweigh the limitation in competition.

(2) Once the framework agreement is in place there is a lock in period fixed both for buyer and supplier. The disadvantage is that the specifications, price, etc. are fixed for the specified period. There is little scope left for innovation or change in the requested goods or services up to the lock in period in case the market changes.

Examples of Framework Agreements

(a) A hotel is entering into a framework agreement for the supply of soaps, shampoo and toothpastes with three suppliers.

(b) A company enters into a framework agreement with a supplier for supplies of office stationary.

(c) A central purchasing organization on behalf of eight organizations, enters into a framework agreement with three suppliers to supply vehicles.

Conclusion

Framework agreements are the agreements between one of more buyers or suppliers, which basically define the terms and conditions of the contract, mainly with regard to price for a period of time. These type of contracts are used for the procurement of commonly used, off-the-shelf goods, purchased on the basis of lowest price. Framework agreement is a fast way to procure goods, works and consultancy services. Sometimes a multi-supplier framework agreement is also prepared which enables the buyer to select from a number of firms to ensure that the procured goods or services provide the best value for money.

The main advantage of framework agreements is that they save time and cost of sourcing process by avoiding the need to renegotiate terms and conditions again and again.

These agreements are for the long term and hence help the parties to maintain good relationship with each other.

One of the limitations of the framework agreements is that these agreements limit the competition. Other limitation of the framework agreements is that the framework agreements are fixed for a pre-specified lock in period and hence, there is little scope left for innovation or change in the requested goods or services up to the lock in period in case the market changes.

Read more: Basic Contract Documents for Construction Projects

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Rajesh Pant
Rajesh Panthttps://managemententhusiast.com
My name is Rajesh Pant. I am M. Tech. (Civil Engineering) and M. B. A. (Infrastructure Management). I have gained knowledge of contract management, procurement & project management while I handled various infrastructure projects as Executive Engineer/ Procurement & Contract Management Expert in Govt. Sector. I also have exposure of handling projects financed by multi-lateral organizations like the World Bank Projects. During my MBA studies I developed interest in management concepts.
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