1. Explain what are royalty rate contracts and fixed-fee contracts. What is the
ID: 1211142 • Letter: 1
Question
1. Explain what are royalty rate contracts and fixed-fee contracts. What is the main difference between them? 2. Give an example of each of the two types of contracts. Explain which type of contract is used in your organization. (If you are not currently employed you can give a hypothetical example or an example from your experience). 3. Describe the differences in the incentive effects of the contracts. What are the advantages and the disadvantages of each of the contracts? Explain the reasons why one of them and not the other is used in your organization. Describe the consequences for your organization of changing the existing contract.
Explanation / Answer
Royalty rate contracts are awarded to third parties for rights to use their assets, licences etc, here the rates are ususally a percentage of the gross or net revenues i.e. variable, whereas in a fixed fee contract the payment amount is fixed and does not depend on resources used or time extended.
In my organization, fixed rate contracts are used for example an AMC to manage all the printers, servers etc.
Royalty contracts would be the franchisee models i.e say a person who takes up a subway franchisee will have to pay a fixed fee + a royalty of some fixed percentage on the total sales.
Both the parties need to mutually agree as to which type of contact suits them, in fact royalty contract does not suit most of the scenarios. In a fixed rate contract the outgo is fixed irrespective of the actual use, so it is usually beneficial where you are certain of the usage and it is mostly on the higher end, also you are aware of the costs. On the other hand if you are unsure of the final usage one may decide to go for royalty rate contracts.
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