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Cost and Risk

Suppose someone tells you the only thing that matters is cost when deciding to provide a good or service internally or externally. That is, if you can do it cheaper internally, then that is how it should be done. Or, on the other hand, if an external supplier can do it cheaper, then you should use that supplier. What is your response?

Describe the difference between a fixed price contract and a target price contract, and, in your answer, use some arbitrary numbers to illustrate.

What is cost risk? Is the cost risk for the owner greater in a reimbursable contract with fixed fee or in a reimbursable contract with percentage fee? Why?

Solution Preview

Suppose someone tells you the only thing that matters is cost when deciding to provide a good or service internally or externally. That is, if you can do it cheaper internally, then that is how it should be done. Or, on the other hand, if an external supplier can do it cheaper, then you should use that supplier. What is your response?

Answer
That is correct: If you can do it cheaper internally, then that is how it should be done. Or, on the other hand, if an external supplier can do it cheaper, then you should use that supplier.

Describe the difference between a fixed price contract and a target price contract, and, in your answer, use some arbitrary numbers to illustrate.

Answer
A fixed price contract is a contract which is organized in ...

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