Cost Plus Billing

Term Definition

Cost plus billing is billing that is based upon cost plus an added amount, also known as markup. For example, a tax preparation firm hires an accountant to prepare year-end tax filings for corporations. The accountant charges $50 per hour. The firm has a rule to markup every hour of work performed by 25%. The firm would be billed $62.50 per hour.

Cost plus billing requires accurate job cost data, such as time, material, labor, equipment, and subcontractors. Companies may employ a number of different billing methods even within the same project. For example, an organization may use cost plus billing for one invoice related to one component of the project, but the other invoices may be billed at fixed or flat fee rates. Project management software that integrates accounting functions can be a useful tool for organizations. Automating the process would enable the organization to set up billing rules. An organiza¬tion might have a billing rule that depends on the cost of service delivered, plus a markup. This rule would only apply to billing rules. The cost plus billing rule would be defined using the following parameters: Cost Rule, Markup Multiple, Markup Amount, and Date Span. Let us look at an example: A tax preparation firm hired an accountant to prepare year-end tax filings for corporations. The accountant charges $50 per hour. The firm has a rule to markup every hour of work performed by 25%. The cost plus billing rule would be defined in the system as follows:

• Cost rule: $50 per hour accountant cost rule
• Markup Multiple: 1.25
• Markup Amount: $0

Work is subcontracted to a consulting company that has agreed to charge $10,000 for 100 hours of work. The customer is to be billed with an hourly markup of 30% and a project overhead of $5,000 for work per¬formed.
The cost plus billing rule would be defined as follows:

• Cost rule: $10,000/100 hours sub prorated contract cost rule
• Markup Multiple: 1.30
• Markup Amount: $5,000

Using project management software would facilitate the task of invoicing clients using multiple billing methodologies.

Area of Application 
Project Accounting