What Is a Cost Company Arrangement?
A cost company arrangement is an agreement between companies in which each participant agrees to pay part of the operating and financing expenses associated with producing a product in return for receiving that part of the output at no markup.
The cost company is the entity formed in the arrangement, which exists only in contractual form.
The companies involved receive their exact proportion of the end product and pay their proportion of costs. They are essentially operating on a non-profit basis because no profit margin was added to the product.
- A cost company arrangement is a type of joint venture.
- Each company involved contributes a share of the costs and receives a share of the goods produced, with no markup attached.
- This arrangement effectively removes taxable profit from the venture.
Understanding a Cost Company Arrangement
The cost company arrangement is one of a number of possible variations in joint venture agreements, each with its own advantages and disadvantages.
The cost company arrangement is sometimes encountered as a condition to receiving financing for a project. It also may be known as a cost company agreement or a cost company approach.
A key advantage of the cost company arrangement is that the end product is transferred at cost, without any markup. There are tax advantages to having no profit.
In addition, the participants don't need to worry about the potential 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 some foreign countries. Host companies, not unnaturally, like to see companies realize profit so that they can pay taxes on it.