How do you perform a cost breakdown?
Deciding on what supplier to buy from requires careful planning and consideration, but usually boils down to: Which supplier gives you the most and best bang for your buck?
Initial estimates can hardly be completely accurate, but it’s possible to increase this accuracy by preparing a detailed cost breakdown of all relevant cost factors. Depending on the accuracy level of the cost breakdown analysis, it can be leveraged within different steps of the process of choosing suppliers, both the initial research phase as well as the negotiation phase.
A cost breakdown is 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
Regardless of what the cost breakdown will be used for, clarity and a logical structure is A and O. Structuring a cost breakdown analysis clearly and correctly is essential for future communication with suppliers, as well as to gain a better understanding about the different cost factors.
Creating a cost breakdown analysis
The first step of creating a clear, coherent and detailed cost breakdown structure is to identify the key components of the supplier or project. These include:
- Cost drivers: raw materials cost, labour cost, construction procurement and implementation cost, logistics procurement cost, etc.
- Amounts: amount of work time, number of items, amounts of materials
- Overhead or hidden costs: this refers to costs that don’t bring any direct value, but influence the activity in some way, shape or form
Depending on the purpose of the cost breakdown, the cost data can be grouped by different parameters including:
- Time periods: If it’s a project cost breakdown, it can be grouped by time periods. A time period data grouping can be used for monthly, weekly, quarterly, etc. costs and is usually combined with grouping by workflow steps and includes a total cost for the entire project.
- Cost types: When there’s no time breakdown required, structuring the cost data by cost types is a more common approach. This results in a cost breakdown that helps identify key cost drivers and their influence on the final figure. Grouping by cost types is preferred when the purpose of the cost breakdown is to define manageability of specific cost components to find ways to decrease the total cost.
Common types of cost drivers/cost types include:
- Labour costs
- Transportation procurement and execution costs
- Manufacturing procurement costs
- Raw materials
Common pitfalls to avoid when creating a cost breakdown analysis
Identifying everything that needs to be included in a cost breakdown and create a coherent and clear analysis is meticulous work. It can, as with any type of work, be affected by the infamous human factor. The ever-present risk of human error can potentially lower the accuracy of estimation based on the cost breakdown, the estimated changes in a project, and potentially high costs. There are also a few other common pitfalls one need to consider when creating a cost breakdown analysis:
- Omitting certain cost drivers.
- Not accounting for routine works like communications, organisational and administrative works in the final figure from the cost breakdown.
- Not accounting for non-billable works if the cost breakdown is used for internal reference purposes.
Create a detailed cost breakdown with Prognos
Through our platforms, Prognos Tailored and Prognos Online, you get access to all the data required on different cost drivers/types to create clear and detailed cost breakdown and should cost analysis with high accuracy.
Prepare your fact-based negotiations with Prognos. Access the cost data you need in order to get the most out of your suppliers, with data tailored for your specific situation.