A cost breakdown is a systematic way of identifying and exploring each individual factor that makes up the total cost of a product, service, part, etc. This includes direct cost drivers such as raw materials cost, manufacturing cost, labour costs, transportation rates, and taxation tariffs.
Since products, services and parts progresses throughout its lifecycle, evolving and undergoing price changes. A detailed cost breakdown for all of the elements is often necessary for a company to gain a better margin insight. Performing a cost breakdown analysis (CBA) helps you understand the in’s and out’s of all relevant cost factors surrounding a specific product/service/part.
A cost breakdown will lead your organisation to be more flexible, stronger, and better equipped to handle potential challenges. A cost breakdown is most commonly used for one of three reasons:
- For internal use to estimate work costs, calculate the profitability of a project, or similar
- For coordinating project costs with clients to get their approval for final price
- For negotiation leverage with suppliers and vendors, using cost breakdown data and knowledge to ensure the prices are fair
The benefits of performing a Cost breakdown
When performing a cost breakdown analysis you can expect the following benefits:
- Identification of potential cost-saving opportunities
- Greater transparency and insight into the costs of both external and internal products/services/parts
- A better understanding of your costs
- The data to support a more factual approach to price negotiations
- Fact leverage against unfair prices
What is a project cost breakdown?
A project cost breakdown is a cost breakdown much larger in scale, having to consider all the cost elements of a complete project rather than that of a single product/service/part. Preparing a detailed project cost breakdown might be somewhat tedious, but it’s a very important part of project planning.
Regardless of the type of a cost breakdown, the most important aspect is achieving clarity and having a logical structure for the cost breakdown. It’s vital to prepare for future communication with vendors and suppliers, as well as for better understanding of how costs can be managed through the course of a project.
Effectivise your cost breakdown analysis with Prognos
There was a time when the suppliers and vendors were reluctant to share their cost information stemming from them being concerned about the buyer using that information to execute strong-arm tactics in the price negotiation. That time has long passed.
Nowadays all necessary data to perform a cost breakdown analysis is readily available through different channels. While you could gather the data for a cost breakdown analysis manually, it will take a lot of time gathering it and sorting through it, valuable time you’d rather spend on other preparations for your upcoming negotiations.
With Prognos you get access to a highly interactive cost data tool to help you create a detailed cost breakdown of your product/service/part, giving you the data and facts to back up your arguments. Prognos is available as two different solutions, contact us directly for a demo:
- Prognos Online is our “basic” tool where you can access over 8 000 indicies on raw materials, components, wages, and currencies, giving you the groundwork to support your cost breakdown analysis.
- Through our platform Prognos Tailored you get access to continuously updated, interactive reports supporting the whole process of a cost breakdown. Here you can dig deep into your materials, compare prices to your own cost development, export the graphs, or export the underlying data for further analysis.
The reports are customized by Prognos experts according to your needs, enabling you to focus on the negotiation strategy rather than having to scour the world wide web for cost data to perform your cost breakdown analysis.
What is a cost breakdown structure?
Why do we use cost models?
A cost breakdown analysis model can be performed for several reasons:
- For internal use to calculate work cost and profitability
- For coordinating costs with clients to get their final approval on the price
- To obtain fact-based cost data and knowledge to use as leverage in negotiations with suppliers and vendors, ensuring the prices are fair and you get a good deal.
How to develop a cost model?
- Decide on what you want to create a cost model around (projects/services/products/etc.)
- Collect relevant, consistent historical cost driver data (labour costs, raw materials cost, transportation costs, etc.)
- Sort through the data, refine and categorize it
- Analyze the data and use it to perform calculations and cost estimations for your project/service/product
What are the types of costs?
Different costs for the procurement industry include:
- Raw materials
- Manufacturing costs
- Labour costs
- Transportations rates
- Taxation tariffs
The costs within these areas can be divided further into cost categories including:
- Fixed and variable costs
- Direct and indirect costs
- Product and period costs
- Controllable and uncontrollable costs
- Incremental and opportunity costs
- Out-of-pocket costs and sunk costs
- Imputed costs