Rate contracts are mutual agreements between the buyer and the seller to operate a set of chosen items, during a given period of time, for a fixed price or price variation.
Under this system the rates are fixed and at times even the quantity of the selected items. As and when the need arises the buyer issues a Purchase order directly on the basis of the rate chart available on the supplier who in turn supplies the items.

The system of rate contract is prevalent in public sector organistions and government departments. It is common for the suppliers to advertise that they are on “rate contract” with the DGS & D (Directorate General of Supply & Disposal), for the specific period for

the given items. After negotiation, the seller and the buyer agree to the rates of items. Application of rate contract helps organisations cut down the internal administrative lead time as individual firms need not go through the central purchasing departments and can place orders directly with the suppliers.

However, suppliers always demand higher prices for prompt delivery, as rate contracts normally stipulate only the rate and not the schedule on which the item is needed. This difficulty has been avoided by ensuring the delivery of a minimum quantity at the agreed rates. This procedure of fixing a minimum quantity is called the running contract and is being practiced by the railways and the DGS&D.

As mentioned above, this system of buying helps an organisation reduce its internal as well as the external lead time, reduces administrative work load as the files don't need to go up and down, helps in building Buyer-supplier relationship as the contract period id usually one year and then there is always a chance of the same players doing the next contract.

The system works well normally in a situation where the selected items are routinely consumed. However, there is no compulsion that the demand be uniform over the period of time.