Cost Pricing: Cost-Plus Method

In the same way markup pricing arrives at the price by adding a certain percentage to the product’s cost, cost-plus pricing also adds to the cost by using a fixed monetary amount rather than percentage. For instance, a contractor hired to renovate a homeowner’s bathroom will estimate the cost of doing the job by adding his/her total labor cost to the cost of the materials used in the renovation. The homeowner’s selection of ceramic tile to be used in the bathroom is likely to have little effect on the labor needed to install it whether it is a low-end, low-priced tile or a high-end, premium-priced tile. Assuming most materials in the bathroom project are standard sizes and configuration, any change in the total price for the renovation is a result of changes in material costs while labor costs are likely to remain constant.