Cost plus is a pricing strategy where a supplier or contractor sets the price of a product or service based on the cost of production plus a markup or profit margin. In other words, the cost of producing the product or service is calculated, and a markup is added to determine the selling price.
Under a cost-plus arrangement, the supplier or contractor is reimbursed for the actual costs incurred during the performance of the contract, including labor, materials, overhead, and other expenses. The markup or profit margin is typically negotiated as a percentage of the total cost and is intended to cover the supplier's or contractor's overhead expenses and generate a reasonable profit.
Cost plus pricing is commonly used in government contracts, construction projects, and other procurement arrangements where production costs are difficult to estimate or are subject to change. The cost-plus pricing arrangement provides a degree of certainty and transparency for both the buyer and the supplier. It ensures that the supplier is fairly compensated for the work performed. However, cost-plus pricing can also be criticized for potentially incentivizing inefficiencies and higher costs, as the supplier may be less motivated to control costs if they are guaranteed reimbursement.