What is cost-plus pricing?
- By Book Keeping Pros
- Sources checked 16 Oct 2026
Definition
Cost-plus pricing is a way of setting prices that starts from cost. The business works out the full cost of making and supplying one unit of a product or service, including materials, labour and a share of overheads, then adds an amount on top so the price covers that cost and leaves a profit.
The method is only as sound as the cost figure it starts from. Direct costs, such as the materials and labour that go into each item, can usually be traced from supplier bills and time records. Overheads such as rent, insurance and software are harder, because they are shared across everything the business sells, so the business has to decide what share each product or hour of work should carry. Leave that share out and the price covers what the item costs to make, but not what it costs to keep the business open.
Cost-plus pricing and a mark-up are linked but are not the same thing. The mark-up is the amount added; cost-plus is the whole approach of building a price up from a costed base. Because the price is built up from costs, the method on its own says little about what customers will pay or what competitors charge.
For the books, the useful habit is keeping the costing behind each price: the cost figures used, the date they were taken from the records and the amount added. When supplier bills or wage rates change, that costing shows which prices were built on old figures.
In Australia
business.gov.au's guide to choosing a pricing strategy lists, among its common strategies, working out the total cost of making and supplying a product or service and then adding a mark-up or margin. It says that total should take in all the relevant costs, giving materials, labour and overheads as examples.
It notes that businesses and independent contractors who are paid to do work for customers, rather than to sell physical products, often work out all of their business costs as an hourly rate.
The same guide cautions against copying competitors' prices exactly. It says your price should cover your costs and reflect the full value of the product or service.
Worked example
| Item | Amount (AUD) |
|---|---|
| Timber and hardware | 180.00 |
| Labour: time spent making the table | 240.00 |
| Share of workshop overheads | 80.00 |
| Full cost of the table | 500.00 |
| Amount added on top of cost | 150.00 |
| Price charged | 650.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Leaving the owner's own time out of the costing, so labour is missing from the cost base.
- Using a share of overheads worked out years ago, after rent, insurance or other running costs have changed.
- Keeping no record of the costing behind a price, so nobody can tell later which cost figures it was built on.
- Assuming a price built up from cost will sell, without checking what customers pay for similar products.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Choose a pricing strategy
business.gov.au, Australian Government. Current at 16 October 2026, released 1 October 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.