Discuss the advantages and disadvantages of contracts on behalf of manufacturers and contracts on behalf of contractees.

QUESTION FOUR

The creation of contract is the process whereby the outsourcing of a product to a reputed manufacturer. The advantages and disadvantages for contracts on behalf of manufactures and also on behalf of contractors are as follows:

Contract on Behalf of Manufactures:

In a contract with a contract manufacturer (CM) the components or final products are produced by that reputed manufacturer on behalf of the hiring firm. The price will be agreed earlier.

Advantages:

• Chance of loss happening due to price fluctuation is lesser
• In this type of contract, the contractor knows about the percentage of profit to be earned.
• This contract is suitable when the probable cost are not predictable in advance.
• The possibility of any loss is limited.

Disadvantages :

• Extra profit making is not possible for the contractor even in favorable market conditions.
• Chances of dispute may arise regarding the ascertainment of cost
• The profits from contract may not be adequate to cover the expenses

Contract on behalf of Contractee:

Advantages:

• Contractee seems to be satisfied because the price is not arbitrary.
• The price of the contract is determined based on the actual cost
• Absence of purchase risk for the contractee is an another advantage

Disadvantages :

• The ascertainment of the contract cost is not possible
• The absence of any cost incentive for the contractee is the another disadvantage