International Journal of Purchasing and Materials Management

Cost Plus What? The Importance of Accurate Profit Calculations in Cost-Plus Agreements Members Only Content

As cost-plus contracts increase in frequency and complexity, purchasing professionals are required to exercise greater degrees of sophistication in understanding applicable production costs as well as negotiating the appropriate profit suppliers will earn over the life of an agreement. While the need to evaluate and eliminate nonvalue added costs remains a critical component of sustainable supplier relationships, the procurement professional must equally insist on objective definitions of, and clear measures for, supplier returns. By using discounted cash flow analysis, procurement professionals can quantify after-tax returns commensurate with the supplier's risk in a cost-plus contract.

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