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What Is a Rate Contract?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 September 2016
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    2003-2016
    Conjecture Corporation
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Also known as a rate agreement, a rate contract (RC) is a legally binding document that is utilized to create a standard that is used in the purchase of certain types of goods and services. Considered a responsible and practical type of procurement cost reduction strategy, this type of contract can be adapted to a number of situations, allowing a business with an international presence to create different contracts that apply to specific nations or regions, based on the cost of purchasing essential products in those areas. Depending on the type of business operation involved, it is even possible to create a viable rate contract that is applicable to the total global operation.

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The basic idea behind a rate contract is to aid a company in establishing parameters for the purchase of goods and services necessary for the continued operation of the business. This type of arrangement is not created in a vacuum. In order to structure a workable agreement, it is important to consider the volume of each product that is required in a specific time frame, the range of suppliers who can meet those needs, and the average price for those goods within a defined region or market. Taking the time to identify these elements makes it possible to identify which suppliers can meet the needs, have better than average pricing, and are more likely to work with the client in order to create a pricing matrix that fits well within the limitations imposed by the client.

One of the greatest benefits of a rate contract is the controlling of operational expenses. Since this type of contract can be multi-layered, it is possible to set limits on rates for all sorts of expenditures, ranging from raw materials to office supplies and even travel expenses for sales teams and others in the company organization. This level of control makes the task of planning budgets and monitoring expenses much easier, and over the long term can save companies a great deal of money.

While a global rate contract is sometimes feasible, many companies find that operating in a number of nations and complying with the laws and regulations imposed by different countries may require creating a series of regionally based contract models. While somewhat more complex in design, this strategy still has the potential to save a great deal of money, which in turn enhances the potential of the business to generate the highest level of profit possible. When the plan is managed responsibly, the opportunity to take advantage of additional price breaks over time is also possible, allowing the business to reduce its operational expenses even further.

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