27 March 2003
Q: Some of my suppliers refuse to provide cost breakdowns for services. I have used cost breakdowns on components and need advice on using cost breakdowns on services. What should I do?A: Brian Farrington, managing director of consultancy Brian Farrington Ltd, writes: The first principle here is that you are quite right to ask for cost breakdowns. A supplier may refuse, blaming company policy, that they never do it and it wouldn't help you anyway, or so they say. You should tell them that it is your policy to require cost breakdowns. Often, it is a matter of being firm and persisting until the breakdowns are provided.
Assuming that the supplier agrees to provide one, what level of detail should you ask for? I would advise you to go beyond a simple percentage split between labour, materials (perhaps low with a service), overheads and profit. This really isn't enough to expose the detail upon which to base informed decisions on the level of pricing being proposed.
The time to get cost breakdowns is at the quotation or tender stage. It is professional practice to ask for the key cost drivers. They will, of course, be different for a manufactured item as opposed to a service provision. In the first instance, the materials are usually the highest cost. This requires knowledge of the bill of materials if costs are to be challenged. In the case of services, it is the labour and related costs that are significant.
An example from the service sector illustrates the point. Many suppliers quote an hourly rate, such as £50 per hour. What does this mean? Get it broken down. You need to know the wages or salary being paid to the employee, National Insurance contributions, pension, training, sickness allowance, clothing, mobile telephones and other benefits.
You also need to establish whether overheads and profit are included in the hourly rate. It is not unusual to find overheads and profit are counted twice. This means that they are in both the hourly rate and the price. This element is a big negotiation opportunity on services.
With regard to overheads, you should check what is included. In a recent review for a client, we found that the salesperson's mortgage repayment was a line item of cost, as was the IT infrastructure to support the salesperson, the mobile telephone, computer, house insurance and almost the kitchen sink. When these are challenged professionally, you have the opportunity to lower the price, but without rendering the work unprofitable.
Professional suppliers will provide this level of detail. If they do, the buying profession should respond in an equally professional manner. One of the concerns regularly expressed by suppliers is related to the buyer disclosing sensitive information to their competitors. That must not be done under any circumstances.