Direct and Indirect Procurement Planning Costs
When procuring goods, some of the direct and indirect costs to include when preparing your business case seeking approval for the acquisition include:
- Shipping and packaging
- Costs of energy use if applicable
- Maintenance and warranties
- Parts, repairs, consumable supplies
- Disposal at end of the lifecycle
- Training and knowledge transfer costs
Intangible Procurement Planning Costs
When it comes to procuring intangibles such as consulting or other services, however, the calculations become a bit more challenging to nail down. Consider including:
- Transition in costs
- Costs associated with temporary loss of productivity
- Conversion and retraining costs
- Costs associated with knowledge transfer
- Transition out costs
There is No ‘One Size Fits All’ Approach
Each acquisition is unique, so there is no ‘one size fits all’ approach to calculating the total cost of ownership. The above gives some guidance on the typical items factored in, but you must work with your internal teams and subject matter experts to ensure you fully considered all aspects of the acquisition from cradle to grave. Calculating the total cost of ownership in the planning stage can help an organization protect itself from future cost overruns, and can be particularly important when you have a strong incumbent vendor. Evaluating responses based on all costs associated with the entire lifecycle of the acquisition rather than just the up-front purchase costs helps to level the procurement playing field so that others can legitimately compete. As with any procurement process, ensure you carefully and accurately include information for respondents on precisely how this important aspect of their proposals will be evaluated.
Considering the total cost of ownership for any significant procurement helps avoid unpleasant surprises later, ensures due diligence before proceeding to market, and provides approvers with complete information about costing so they can make a fully informed decision when considering approval for the commitment of funds. It also helps keep the auditors happy.
This article was originally published in The Legal Edge on July 7, 2016
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Maureen has been an instructor and curriculum designer with NECI since 1995. In 2010, Maureen managed the curriculum development process for the Public Sector Procurement Program (PSPP), which has since been accredited by the Supply Chain Sector Council and won the Summit Award of Excellence for Leadership in Public Procurement.
An experienced litigator, mediator and dispute resolution practitioner, Maureen has an in-depth knowledge of both procurement law and contracting issues with particular expertise in negotiations. In her spare time, she volunteers in Restorative Justice.
Renowned for her engaging teaching style, one of Maureen’s many strengths is her ability to integrate legal concepts with business practices, making often-difficult concepts accessible and understandable for learners at all levels.
Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case. For any particular legal problem, seek advice directly from your lawyer or in-house counsel. All dates, contact information and website addresses were current at the time of original publication.