Certified Supply Chain Professional (CSCP) Practice Exam

What does a cost-based contract connect?

1. The price of goods/services to production outputs

2. The price to the cost of inputs and related factors

3. The price to the customer service quality

4. The price to competitor pricing strategies

The correct answer is: The price to the cost of inputs and related factors

A cost-based contract primarily connects the price to the cost of inputs and related factors. In this type of contract, the payment is determined by the production costs incurred during the execution of the agreement. This means that as the costs of materials, labor, or overhead fluctuate, the price charged to the buyer can also adjust accordingly. This approach benefits suppliers by ensuring they are compensated for their actual costs while providing a degree of price flexibility based on those costs. The focus on inputs and related cost elements allows for more accurate and fair pricing in contracts, reflecting the economic realities of production and service delivery. Other options do not fully capture this essential relationship. For instance, connecting the price of goods to production outputs focuses more on the performance or volume aspects instead of the underlying cost structure. Linking the price to customer service quality pertains more to value-based pricing rather than cost-plus considerations. Similarly, connecting the price to competitor pricing strategies involves market dynamics rather than the internal cost factors that define a cost-based contract.