Plain English
If one group company makes something for another, the cost plus method asks: what gross profit margin would an independent manufacturer charge on top of its direct and indirect costs? The controlled price is compared to that cost-plus outcome.
Technical definition
The cost plus method compares the gross profit mark-up earned in a controlled transaction to the gross profit mark-up earned in comparable uncontrolled transactions, expressed as a percentage of the relevant costs. It is most useful where semi-finished goods are sold between associated enterprises or where services are provided.
Why it matters
It is the natural method for routine manufacturing, assembly and low-risk service entities because it links remuneration directly to the functions performed and costs borne.
How it works in practice
- 01Identify the relevant costs of the supplier (direct, indirect and operating).
- 02Find comparable uncontrolled transactions showing comparable gross mark-ups.
- 03Adjust for differences in functions performed, risks borne, assets used and market circumstances.
- 04Apply the adjusted mark-up to the controlled costs to derive an arm's length price.
- 05Compare the controlled outcome to the derived range and document variances.
Worked example
Contract manufacturer in Eastern Europe
A Polish entity assembles components for its German parent, bears limited inventory risk, and owns no valuable intangibles. Comparable independent contract manufacturers in the region earn gross mark-ups of 7% to 10% on full costs. The group's cost base is PLN 50 million. An arm's length range of PLN 3.5m to PLN 5.0m gross profit implies a controlled price of PLN 53.5m to PLN 55.0m.
Common mistakes
- Using accounting cost classifications that exclude material indirect costs.
- Applying a net margin instead of a gross mark-up.
- Ignoring differences in inventory, warranty and credit risk.
- Using group-wide overhead allocations that distort the supplier's real cost base.
Audit red flags
- Mark-up that does not vary with functions performed.
- Costs that include non-arm's length charges from related parties.
- No reconciliation between accounting gross margin and the cost base used.
Documentation & data
Documents to hold
- Cost accounting policy and reconciliation to statutory accounts.
- Functional analysis of the supplier.
- Comparable gross mark-up study.
- Description of adjustments for accounting differences.
Data you need
- Full cost breakdown (COGS, operating costs).
- Comparable gross mark-up data.
- Inventory, warranty and credit terms.
- Intercompany agreement.
Who owns this internally: Transfer pricing team sets the method; finance supplies the cost data.
Jurisdiction notes
- OECD
- Recognised under Chapter II of the OECD Transfer Pricing Guidelines as a traditional transaction method.
- United States
- Reg. §1.482-3(d) and (e) set out the comparable profits method and gross margin considerations.
Notes by role
CFOs & finance leaders
Watch for accounting gross margin versus TP gross mark-up; the two are related but not identical.
Frequently asked
- Is cost plus only for manufacturers?
- No. It is also used for routine service providers, contract R&D and toll manufacturers, wherever costs are a reliable base and the supplier does not own valuable intangibles.
Sources & status
- Primary source
OECD Transfer Pricing Guidelines, Chapter II
OECD, 2022
Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.
Careers
How this shows up in the job
Expect to be asked when cost plus is preferable to TNMM. The answer is: when you have reliable cost data and comparable gross mark-ups, and the supplier's functions are limited.
Careers in transfer pricing