Cost Company Arrangement

AAA

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.

RELATED TERMS
  1. Project Management

    The planning and organization of an organization's resources ...
  2. Gantt Chart

    A Gantt chart is a visual representation of a project schedule. ...
  3. Limited Purpose Trust Company

    A trust company that has been chartered by the state to perform ...
  4. Manufacturing Resource Planning ...

    An integrated information system used by businesses. Manufacturing ...
  5. Materials Requirement Planning ...

    One of the first software based integrated information systems ...
  6. Joint Venture - JV

    A business arrangement in which two or more parties agree to ...
Related Articles
  1. Investing

    Clean Or Green Technology Investing

    Innovations in energy and consumption grow as companies adopt them to reduce costs.
  2. Active Trading Fundamentals

    How The Power Of The Masses Drives The Market

    Market psychology is an undeniably powerful force. Find out what you can do about it.
  3. Fundamental Analysis

    Internal Rate Of Return: An Inside Look

    Use this method to choose which project or investment is right for you.
  4. Investing Basics

    What's a Price-Taker?

    Price-taker is an economic term describing a market participant who has no effect on overall market activity.
  5. Economics

    Understanding Organic Growth

    Organic growth is the increase in a company’s revenue and value due to internal operations.
  6. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  7. Investing

    The Rise of Corporate Venture Capital

    After the success of Google Ventures, corporate venture capital is an increasingly popular diversification and hedging tool for many large corporations.
  8. Economics

    Explaining Replacement Cost

    The replacement cost is the cost you’d have to pay to replace an asset with a similar asset at the present time and value.
  9. Investing

    Top Websites to Start an Online Business

    The Internet offers nearly endless ideas and opportunities for new businesses. Here are some great resources to get your online business up and running quickly.
  10. Entrepreneurship

    Here Are The 6 Hottest New York Startups Of 2015

    Meet the latest generation of leading New York startups, which may pose a serious threat to their Silicon Valley counterparts.
RELATED FAQS
  1. How has Google's operations strayed from its original mission statement?

    Google's (GOOG) mission statement has been the same since its inception in 1998: "Organize the world's information and make ... Read Full Answer >>
  2. What are the differences between product bundling and product lines?

    The difference between product bundling and product lines is a product line is a group of related products manufactured by ... Read Full Answer >>
  3. What are some examples of businesses that use market segmentation?

    Numerous types of businesses use market segmentation to optimize their ability to sell to a wide variety of consumers. From ... Read Full Answer >>
  4. What is the difference between the cost of capital and the discount rate?

    The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >>
  5. How does transfer pricing help business?

    Transfer pricing involves the trade of goods or services between two related companies, and both can come out the winner. ... Read Full Answer >>
  6. Are there any practical differences between a wholly owned subsidiary and a regular ...

    There are differences between a wholly owned subsidiary, or a company 100 percent owned by another company, and a regular ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  2. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  3. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  4. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  5. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  6. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!