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Author Topic: LR Paradox (HARD question)  (Read 2466 times)

speshl k

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Re: LR Paradox (HARD question)
« Reply #10 on: August 21, 2011, 11:32:04 PM »
Ok, but (D) does not explain cost overruns for the fixed profit plan. It seems to address only half the paradox! 

Thanks for helping.

River

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Re: LR Paradox (HARD question)
« Reply #11 on: September 18, 2011, 12:23:12 AM »
1) Cost-Plus contract:higher costs yield higher profits for the contractor. Then, you as a contarctor may bill your client more cost to get more profits.
2) Fixed-profit contract: you as a contractor may use any material to be easily and conveniently obtained, regardless of the costs, because you get no profits from procuring the materials. you may order costly materials or not
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Yet the fixed-profit contact results in cost oevrruns more commonly than cost-plus contract.  Why?   under cost-plus contract your client would be concern about cost as you may get more profits by causing him more costs while under fixed-profit contract you may not care for the costly materials or less costly materials since you get the fixed amount of profits. Sometimes you may exceed the cost over your profits by mistakes or intentionally.  As long as your client check the bills, your profits  under cost-plus contract would be limited to some dgree since your client is likley to monitor the bills closely; under the fixed profit contract, your client may relax as to the cots over the profits under assumption that you would unlikley overcharge the costs for your profit. Thus, the cost overruns are more common in the fixed profit contract.

Simply put, if you have contrcat for paying hourly,  the contractor may delay the working hour inetntionally to get paid more. Now you may monitor him closely; if you have contarct for paying uopn the compeltion of a project, the contarctor may not complete it on time absent exact time due.  Under which contract you will save more time?

Now the answer is clear?