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Cost plus what? The importance of accurate profit calculations in cost-plus agreements.
INTRODUCTION
When a procurement professional negotiates a cost-plus agreement with a key supplier, the "plus" is generally meant to be profit. How that profit is calculated, though, does not always get the attention it deserves. On the cost side, raw material cost indexes, activity-based accounting practices,[1] and even open book audits help to ensure that a buyer is not overpaying for direct and indirect production expenses. Profits, however, seem to be more subjective, often representing some internal "hurdle rate" that may be presented to the buyer as nonnegotiable.
A danger to the procurement professional is that after all of the hard work to understand ...
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