What Is Cost Company Arrangement
A cost company arrangement is an agreement between companies that are working together in which certain participants of a project receive the output at no markup in cost, but have to pay all the operating and financing 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 on 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
A key advantage of the cost company arrangement is that output is transferred at cost, without any markup. If there is no profit, then there are tax advantages. Additionally, the participants don't need to worry about the antitrust implications of dividing up the profits. Another advantage is that 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 – since the host country will want to see some sort of profit realized so they can charge taxes to generate government revenue.