A compensation model fully reimburses a supplier for their actual cost plus an additional markup. The markup can either be variable or a fixed fee. By definition, cost reimbursement is a variable price agreement. A cost-reimbursement approach is appropriate when it is too difficult to estimate a fixed price with sufficient accuracy and when the supplier will not agree to assume the risks associated with unknowns. A cost-reimbursement compensation is commonly used to develop a new product or service or for research and development activities. For example, the U.S. government has agreed to a cost-reimbursement compensation model with military defense companies that are developing new technologies for national defense.
A compensation model fully reimburses a supplier for their actual cost plus an additional markup. The markup can either be variable or a fixed fee. By definition, cost reimbursement is a variable price agreement. A cost-reimbursement approach is appropriate when it is too difficult to estimate a fixed price with sufficient accuracy and when the supplier will not agree to assume the risks associated with unknowns. A cost-reimbursement compensation is commonly used to develop a new product or service or for research and development activities. For example, the U.S. government has agreed to a cost-reimbursement compensation model with military defense companies that are developing new technologies for national defense.