Which compensation method is based on the revenue, cost, and profitability result of a project engagement?

The compensation method that is based on the revenue, cost, and profitability result of a project engagement is value-based pricing. This approach involves setting prices primarily, but not exclusively, on the perceived value of the service to the client rather than solely on the cost of delivering the service. In this model, the focus is on the outcome and impact of the project, allowing for adjustments based on the project's success in delivering results that generate revenue or savings for the client.

Value-based pricing takes into account how much the client is willing to pay for the value provided, which aligns with the project's financial outcome, making it particularly suitable for engagements where the results can significantly influence costs and profitability. This method encourages businesses to deliver quality outcomes while also providing flexibility in pricing based on the perceived benefits delivered to the client.

Other compensation methods, such as lump sum or fixed fee, typically have a predetermined price set regardless of the final project outcomes, while time basis focuses on billing clients for the actual time spent on the project. Direct personnel expenses are more about the costs incurred based on the time and resources spent rather than the value generated. Therefore, value-based pricing appropriately aligns with the revenue and profitability aspects of a project engagement.