Plain definition
Cost-plus pricing sets a selling price by adding a chosen markup to a defined cost base. Its result depends on what costs are included and whether the markup covers profit, risk, discounts, and overheads.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A supplier calculates a cost base and adds 30%, quoting . Before accepting, the manager checks whether the cost base includes warranty, discount, and delivery risk; otherwise the markup may not cover the promised service.
A supplier prices a contract from direct cost but omits installation risk and the requested payment delay. The first quote wins the sale but creates a loss; the revised model adds defined support, risk, and financing allowances before choosing markup.
Why it matters
Cost-plus is disciplined only when the cost base is complete for the promise being made; a markup cannot rescue omitted cost.
Practical consequence
Define the cost base, risk allowance, discount authority, and payment terms before approval. Compare the resulting price with market value and capacity, not with cost alone.
Try your own numbers
Separate profit per unit, margin on selling price, markup on cost, and a target-margin price.
Margin and markup