Stephen Bauld's latest Procurement Perspectives column looks at using cost-plus contracts for government projects.
Second, by linking price directly to cost, a customer will automatically benefit should the supplier’s own costs fall.
Despite these theoretical advantages, there are a number of features that make a cost-base price system unattractive to most purchasers. Moreover, to understand the price implications of changes in input costs, the customer would need to know a great deal about the operations of the supplier, and, in practice, it is rare for them to possess such knowledge.Sound financial management requires predictability.
Contracts that provide for the payment of cost plus a percentage present the greatest level of risk, because the greater the cost, the greater the profit.The payment of cost-plus a fixed fee mitigates the risk to some extent. Under such an approach, the supplier has a strong incentive to manage its costs, even though it is still entitled to recover the full amount of its cost.
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