Cost-plus, and where it quietly fails

Cost-plus is the instinct: work out what it costs you, add a margin, quote that. It is the right method in exactly one situation — where the buyer can see your inputs and the market is genuinely commoditised. A printing job, a manufactured component to a supplied specification, a delivery route. There, cost-plus is honest and defensible and everyone in the market is doing the same sum.

It fails in two ways that are hard to see from inside. First, it usually undercounts cost, because the costs people include are the ones that arrive as invoices. Rent, electricity, the phone, the accountant, the software subscription, the hours of quoting and chasing payment that never appear on any bill, and your own time at a rate you would accept from someone else — leave those out and your margin is imaginary. Module four rebuilds this properly.

Second, and more damaging, cost-plus caps your price at your own inefficiency. If you get twice as fast at something, cost-plus says charge half as much, which is precisely backwards: you got better and your income fell. Anywhere the buyer is paying for an outcome rather than for your hours, cost-plus is the wrong instrument.