Cost Company Arrangement

DEFINITION of 'Cost Company Arrangement'

An agreement between companies that are working together, whereby certain participants in a project receive the output at no mark-up in cost, but have to pay all the operating, finances and other expenses associated with the project. The cost company is the company formed in the arrangement. The companies involved receive their exact proportion of product and pay their proportion of costs, essentially operating at a non-profit basis because there was no profit margin added to the product.

This agreement is sometimes encountered as a condition in project finance and is also known as cost company agreement, or cost company approach.

BREAKING DOWN 'Cost Company Arrangement'

The advantage of the cost company arrangement is that output is transfered at cost, without any mark-up. If there is no profit, then there are tax advantages. Also the participants don't need to worry about the antitrust implications of dividing up the profits. Additionally, the companies involved benefit from clearly defined control over the project, compared to a true joint venture.

However, a cost company arrangement can be hard to set up, especially in other countries because the host country will want to see some sort of profit realized so they can charge taxes.