Reference Entry

cost-plus pricing

Nigar Hashimzade, Gareth Myles and John Black

in A Dictionary of Economics

Fifth edition

Published in print January 2017 | ISBN: 9780198759430
Published online January 2017 | e-ISBN: 9780191819940
cost-plus pricing

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A contract providing that price will equal measured costs plus an agreed percentage mark-up for profit. This procedure is criticized because it gives the producer no incentive to keep down costs; rather, the incentive is to increase costs needlessly, thereby increasing the profit margin also. Cost-plus pricing is often used in government contracts, for example in military spending, where the customer wants the product urgently and there is great uncertainty about costs. Under these circumstances a cost-plus contract may give a lower expected price than a fixed-price contract, because any fixed price agreed would include a substantial risk premium for the producer....

Reference Entry.  104 words. 

Subjects: Economics

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