Cost-plus pricing is a pricing model that sets the cost of an item based on the sum of its costs, plus an additional percentage. It’s used in government contracts, where businesses agree to provide goods or services for an agreed-upon cost plus a set percentage. This percentage is often referred to as a margin and is designed to ensure a reasonable profit for the business providing the product or service. Cost-plus pricing makes it easier to predict profits and prepare bids, as it reduces uncertainty concerning the ultimate price of a good or service.
However, cost-plus pricing can be problematic if not managed carefully; as costs rise, so too does the ultimate price, potentially making it uncompetitive in the market. Businesses should therefore set margins with this consideration in mind, paying attention to both cost and demand trends.