Chapter

The Costs of Contracting

Simon Domberger

in The Contracting Organization

Published in print November 1998 | ISBN: 9780198774570
Published online November 2003 | e-ISBN: 9780191596148 | DOI: http://dx.doi.org/10.1093/0198774575.003.0004
 The Costs of Contracting

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This chapter and the previous one outline the costs and benefits of contracting out. While there is merit in separating costs from benefits, and that is how managers intuitively think of the issue, the separation is not always easily achieved, and many of the concepts raised under the heading of benefits also appear under the guise of costs. Hence, costs and benefits become two sides of the same coin, which may not be particularly helpful as a framework for decision‐making. Aspects of the costs of contracting out are addressed in this chapter by looking at the coordination of production activity, cooperation and trust, the costs of transacting and monitoring, loss of control, and miscellaneous other costs. It is concluded that the crucial question is not whether the costs are significantly higher when contacting out than operating in‐house, but whether contracts can be designed in such a way that benefits do exceed the costs; the answer appears to be increasingly in the affirmative.

Keywords: contract design; contracting out; coordination; cost–benefit analysis; costs; loss of control; monitoring; outsourcing; transactions

Chapter.  9113 words. 

Subjects: Microeconomics

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