Inbound Logistics | July 2025

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The End of Cost-Plus: A Legacy Pricing Model in a High-Performance Supply Chain A Case for Performance-Based Pricing

For years, the dominant pricing structure in third-party logistics contracts has been the cost-plus model. Under this approach, customers pay for labor and overhead, plus a xed margin. It’s straightforward and familiar— but is it still the best tool for today’s supply chain? When it comes to 3PL contracts, not all pricing models deliver the same results. And as supply chains evolve with the times, so should the com- mercial models that underpin them. Increasingly, logistics leaders are turning to pay-for-performance or activity-based pricing as a more effective way to align incentives, reduce waste, and drive con- tinuous improvement. COSTPLUS: FAMILIAR, BUT FLAWED Cost-plus, often implemented as an “open-book” agreement, may offer transparency—but it rarely guaran- tees efciency. Because costs are largely xed, the model lacks built-in motiva- tion for productivity gains. If volumes dip, costs don’t necessarily follow. And if performance suffers, the customer often absorbs the risk. In a cost-plus environment, labor inef- ciencies, absenteeism, or even poor process design can go unaddressed because the nancial incentives don’t push toward improvement. That can be a costly blind spot, especially in operations where demand is variable or margins are tight. PAYFORPERFORMANCE: ALIGNED AND ACCOUNTABLE By contrast, a pay-for-performance model, often called cost per unit or activ- ity-based costing, shifts the focus from

culture of accountability, pay for perfor- mance offers a compelling alternative to legacy pricing structures. RETHINKING THE 3PL RELATIONSHIP Ultimately, a pay-for-performance model isn’t just about pricing; it’s about part- nership. It turns the customer-provider relationship into a joint pursuit of opera- tional excellence. When incentives are aligned and results are measured, performance becomes a mutual priority—not just a contractual obligation. In today’s high-stakes supply chain, that alignment can make all the difference. For a more in-depth look at performance-based pricing, see the full article at: www.inboundlogistics.com/articles/ performance-based-pricing/

inputs to outcomes. Customers pay a pre- agreed rate per activity—per case picked, pallet moved, or trailer loaded—tying costs directly to throughput, so labor costs ex with your volume. Labor is compensated based on output, not atten- dance, and performance is measured using engineered standards. This structure builds accountability from the ground up. When workers are paid based on how much they produce, efciency becomes a shared priority. From the oor to the management team, everyone is incentivized to hit targets, reduce errors, and continuously improve. WHEN TO CONSIDER A PAYFORPERFORMANCE MODEL Pay-for-performance isn’t a t for every operation. It works best where: • Volume is variable and through- put is measurable • Clear performance standards can be dened • Data systems can support real- time tracking • All parties are aligned on shared goals For operations seeking greater cost control, improved service levels, and a

From performance-driven labor solutions to warehouse management, high-touch transportation, and last-mile fulfillment, Capstone oers a fully integrated suite of solutions underpinned by a best-in-class technology and operating platform. Learn more: www.capstonelogistics.com

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