Cost Plus Method: Definition, Cost Base and Mark-Up
The cost plus method defined: an arm's length price built as the tested party's costs plus a mark-up benchmarked against comparable service providers and manufacturers.
Definition
The cost plus method (CP) determines the arm’s length price of a controlled transaction as the tested party’s costs incurred for the transaction, plus a mark-up — the mark-up being benchmarked against the mark-ups standalone companies earn on comparable transactions. It is a one-sided, transaction-level method: it prices the tested party’s contribution to the transaction, and it is the natural home of contract manufacturing and routine services.
The method is defined by its cost base (which costs go into the “costs” — the direct costs of the transaction, or a broader operating-cost pool) and its PLI (typically the cost mark-up, operating cost plus, or the cost plus percentage the pool actually supports). Getting the cost base right is most of the method: a mark-up benchmarked on the wrong cost base is a mark-up on a fiction.
Formula
Arm's length price = Cost base + (Cost base × benchmarked mark-up)
PLI = (Price − Cost base) / Cost baseExample
A contract manufacturer charges a mark-up on its production costs. Its costs for the transaction are ₹100 cr; the comparable pool’s cost mark-up IQR is 4.0%–5.5% (mid 4.75%). At its 4.6% mark-up the manufacturer prices at ₹104.6 cr — inside the range. At 7.0%, it is outside, and the file must explain why the pool is the wrong pool or the cost base is the wrong base before anyone calls the price high.
See also
FAQ
Cost plus vs TNMM — when is each right? Cost plus where the transaction is cleanly identifiable and its costs are clean (contract manufacturing, a specified services transaction): it prices the transaction. TNMM where the entity’s overall result is the better unit of comparison (a services provider whose revenue is the service line): it prices the entity. The denominator question decides it.
What belongs in the cost base? The costs of performing the transaction — directly, or as the operating-cost pool the pool’s PLI is defined on. The discipline is consistency: the tested party’s base and the comparables’ base must be the same kind of base, or the mark-up comparison compares apples to the orchard.
Run the screens as a study, not a spreadsheet
Quartyl applies the method, PLI and screening steps above as a pipeline — and keeps a documented reason for every exclusion.
Related docs
Profit Level Indicator (PLI): Definition and Common Types
A profit level indicator defined: the ratio that measures the tested party\'s return for comparison — OM, OP/OC, net cost plus, Berry, ROA — and why the choice is a method decision.
Read docTested Party: Definition, Selection Logic and Documentation
The tested party defined: the entity whose result is benchmarked against the comparable pool — selected as the least complex party, and documented as a decision.
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