In general, fixed-price contracts are more appropriate for production contracts where costs are either known or easily predicted, and cost-plus
contracts are more appropriate in situations--such as development--where costs are uncertain.
Working for the fixed percentage or amount in the cost-plus contract doesn't reward you for doing a better job.
The primary benefit of the cost-plus contract is that it removes any risk of materials price increases.
It's also easier to get jobs based on your reputation with cost-plus contracts, because the price isn't competitively defined.
The problem with the cost-plus contract is the myth that it creates a better relationship between the client and the builder.
Furthermore, overlaying the CPI concept on the resale-price, cost-plus, and other fourth methods applicable to tangible property sales is simply inconsistent with the international norms for transfers of tangible property.
Furthermore, the proposed regulations subject the internationally accepted resale-price and cost-plus methods for transfers of tangible personal property to validation under CPI.
treaty partners) will likely reject the imposition of CPI on the internationally accepted resale-price and cost-plus methods, leading to a considerable increase in double taxation.
In particular, CUP retains its premier position, but the resale-price and cost-plus methods are made equivalent to each other and subject to validation under the CPI concept.
27 As in the case of CAT, if the results produced by the resale price method or the cost-plus method do not fall within the CPI, the method is deemed inapplicable.
In such circumstances, the proposed regulations generally would apply the cost-plus method, reversing the priority of the resale price method under the existing regulations.
31) Where there is a transfer of tangible property, if the resale price method is being applied, the tested party ordinarily will be the related buyer (reseller) of the products; where the cost-plus method is used, the tested party ordinarily will be the seller in the controlled transaction.
4] Under the current priority of methods, the agents would not take into account the fact that the parent company has an apparently reasonable cost-plus methodology, since this method has a lower priority that the resale price method.
In the foregoing example, it is clear that the transfer pricing methodology was not set in an abusive manner, since the cost-plus was well within the range of reason and below that of any potential comparables.
In the case of both a gross margin methodology or a cost-plus methodology, the taxpayer might not get ultimate certainty even if an APA were granted.