Sourcing and Procurement
Glossary
Your trusted guide to exploring sourcing and procurement terms & definitions,
from the world’s leading procurement experts and companies
Cost Plus Incentive Contract
The contractor receives a larger fee if he or she meets certain goals such as keeping costs down or completing the project in a designated time.
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Cost Reductions
Purchasing cost reductions are sustainable in character. These may be the result from a change of specification, a change of supplier, or omitting any unnecessary product quality requirements.
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Cost Reimbursement Contract
Also known as a cost plus contract, cost reimbursement contracts are used by governments, private individuals and businesses that are embarking on building or construction projects, on research projects or on other endeavors where a certain amount of materials will need to be purchased. A family of pricing arrangements or contract types that provide for payment of allowable, allocable, and reasonable costs incurred in the performance of a contract, to the extent that such costs are prescribed or permitted by the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed without the approval of the buyer. Types of cost-reimbursement contracts include: (a) cost without fee, (b) cost-sharing, (c) cost-plus-incentive fee, (d) cost-plus ward fee, and (e) cost-plus fixed fee.
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Cost of goods sold (COGS)
The direct costs for producing goods, i.e. the cost of the materials used, as well as the cost of the labour to produce them and any other allocated overheads. It excludes and distribution or sales costs
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Cost Plus Percentage of Cost Contract
A contractor's fee rises as the actual costs rise. This is disfavored because there is no incentive for cost control on the part of the contractor, and the federal government is prohibited from entering into this type of contract for work performed.
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Cost Reimbursement
A compensation model fully reimburses a supplier for their actual cost plus an additional markup. The markup can either be variable or a fixed fee. By definition, cost reimbursement is a variable price agreement. A cost-reimbursement approach is appropriate when it is too difficult to estimate a fixed price with sufficient accuracy and when the supplier will not agree to assume the risks associated with unknowns. A cost-reimbursement compensation is commonly used to develop a new product or service or for research and development activities. For example, the U.S. government has agreed to a cost-reimbursement compensation model with military defense companies that are developing new technologies for national defense.
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Cost Savings
This is the amount the company saved through the process of sourcing the goods or services. Cost Savings can be difficult to define. In the simplest form, it can be defined by identifying the difference between what was previously paid or expected costs for a good or service. For example, in 2010 Item A cost the company $19 each. After bidding the product through a competitive sourcing process, the company now pays $14 each. That is a cost savings of $5. More complicated formulas may factor in total costs, or soft costs. This resource in the SIG Resource Center provides an overview of cost savings calculation methods: http://www.sig.org/src.php?id=6913
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Costs
Costs shall be quantifiable and may include, without limitation, the price of the given good or service being purchased; the administrative, training, storage, maintenance or other overhead associated with a given good or service; the value of warranties, delivery schedules, financing costs and foregone opportunity costs associated with a given good or service; and the life span and associated life cycle costs of the given good or service being purchased. Life cycle costs may include, but shall not be limited to, costs or savings associated with construction, energy use, maintenance, operation, and salvage or disposal.
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Creative Value Allocation
A process outlined in the book "Getting to We-Negotiating Agreement for Highly Collaborative Relationships" which uses a systematic process for fairly allocating value.
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