Cost-plus pricing is a pricing model in which the price charged for a product or service is equal to its cost of production plus a specific mark up. The model is often used to determine negotiated prices for managed services provider (MSP) or IT procurement contracts.
Government contract pricing is often done on a cost-plus model. However, the use of cost-plus pricing has been criticized in government tendering as it eliminates the motivation of suppliers to control direct, indirect and fixed costs.
Consumers may see cost-plus pricing as a fair and agreeable method of pricing as compared to the sometimes predatory nature of value-based pricing. In some cases, the markup is an amount that has been previously agreed-upon by the buyer and the seller.
Accurate estimation of all costs involved and transparency are essential to make cost-plus pricing both profitable and fair. To calculate cost-plus pricing, one takes the cost and multiplies it by the agreed-upon rate or desired profit margin, which may vary considerably depending on whether it was a negotiated rate or decided by sellers behind closed doors.