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Cost Plus What? The Importance of Accurate Profit Calculations in Cost‐Plus Agreements
Author(s) -
Connor Peter E.,
Hopkins Robert K.
Publication year - 1997
Publication title -
international journal of purchasing and materials management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.75
H-Index - 92
eISSN - 1745-493X
pISSN - 1055-6001
DOI - 10.1111/j.1745-493x.1997.tb00290.x
Subject(s) - sophistication , procurement , cash flow , negotiation , profit (economics) , purchasing , business , implicit cost , microeconomics , economics , total cost , actuarial science , industrial organization , finance , marketing , social science , sociology , political science , law
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.