Buyers have little trouble maintaining control of prices established for tangible products. Most of the time they are fixed by agreement and documented by purchase orders or signed formal contracts. That is usually the way it works for spot buys or one time purchases. However in some cases when the same product is purchased continually over time the prices are permitted to change when they are tied to government indexes. When the index rises by a certain agreed upon amount the price is allowed to change by the same percentage.

Prices or rather costs may vary when they are associated with some service contracts and maintenance requirements. For example, when a piece of equipment is sent out to a supplier for repair, the cost may not be known before the order is placed. The supplier may not actually know what the fault with the equipment is, or what material needs to be replaced, or how much labor will be required to fix the problem. Consequently many suppliers will refuse to give a firm price. They may or may not provide an estimate. Placing an order with this situation is like giving the supplier a blank check to charge whatever he feels he can get away with.

Some control can be established in one of several different ways. You can write the order indicating that the price or cost may not exceed a particular amount. The difficulty with this method is that the supplier may either refuse to accept the limitation, may accept the term but charge the full amount stated regardless of his lower cost, or may realize that the work can’t be done for that amount and then refuse to go on and returns the unrepaired item.

A second method is to obtain a list of priced material that may be needed and obtain the hourly labor rate that the supplier uses. Then the supplier should determine how many hours are actually used. The buyer must then determine if the stated hours seem reasonable or not.