What is a cost breakdown structure, and why is it so important?
A cost breakdown structure, often shortened to CBS, is a breakdown of various expenses that make up the total costs of a project, product, service, part, etc. This includes costs such as:
- Raw materials costs
- Manufacturing procurements costs
- Labour costs
- Construction costs
- Logistics costs
- Transportation rates
- Taxation tariffs
- …and more
In this article, we’ll give a brief overview of the cost breakdown meaning, what purpose a cost breakdown structure fulfills, and why performing a breakdown of cost is so important.
What’s the purpose of a breakdown of cost?
There’s a plethora of different cost factors to consider whether it’s a service or a product. The single most important purpose of creating a cost breakdown is to allow you, the producer/service provider, to gain insight into these elements and understand them better. Establishing a cost breakdown structure helps you understand all the in’s and out’s of all relevant cost factors surrounding your specific product, service, or part.
Why is a cost breakdown important?
- Better control over your costs and budget. Splitting spend into logical cost categories will make it easier for you to control cost. By performing a breakdown of cost, it becomes easier to see what you are committing to in relation to the spend within a certain category.
- Better insight. By allocating the spend within different cost categories, you gain a better insight into how much you are spending within the different categories. This is an important insight to be able to understand how you are tracking against a budget. As such, you will gain the insight you need to be able to make better business decisions.
- Reference for pricing. Sales quotations are often based on a cost estimation broken down into cost categories. Having a perfect insight into all relevant cost factors will increase the quality of your cost estimate, giving you a better position at the negotiation table with suppliers. It also acts as a security to ensure that all different types of costs are actually accounted for.
- Assessing deviations from the plan. A good cost breakdown structure will provide insight into overspend as well as underspend in relation to your original plan. As such, having a proper cost breakdown will make it easier to spot and understand deviations, as well as act upon them to make the right decisions for improvement.
When performing a cost breakdown, 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
Create a better CBS with Prognos
With Prognos you get access to a highly interactive cost data tool to help you create a detailed cost breakdown of your product, service, or part. We give you all the data and facts you need regarding all relevant cost factors to be able to back up your arguments around the negotiating table with your suppliers.
Contact us directly for a demonstration of our two solutions to learn how we can support you:
- Prognos Online is our “basic” tool where you can access over 8 000 indices on raw materials, components, wages, and currencies, giving you the groundwork to support your cost breakdown structure.
- Prognos Tailored gives you 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.