In business, it is vital to have a firm grasp on the maximum amount of expenditures a project can allow. This can mean the difference between being profitable or falling into the red. For every project you undertake that requires funds, you need to know how much you can comfortably spend on it. Beyond that, you also need to know what the absolute maximum is. Having an operation cost target can help you with that.
Overview: What is an operation cost target?
An operation cost target (OCT) is the maximum expenditure allowed for all costs that are associated with a project. These can include overhead, materials, labor, outsourcing, and other costs.
3 benefits of an operation cost target
There are some definite benefits to having an operation cost target:
1. Fortifies creativity
Having an operation cost target leads to creativity within the various sectors involved in a project. Finding creative solutions in order to meet budgetary constraints can foster innovative ideas that can lead a company to further success.
2. Eliminates waste
If working with an operation cost target, there is a higher likelihood of finding unnecessary waste in a project and eliminating it.
3. Team building
If everyone on the team knows that they need to meet the operation cost target, it brings the team together towards meeting a common goal.
Why is an operation cost target important to understand?
An operation cost target is important to understand for the following reasons:
Profitability – Knowing how much can actually be spent can keep a project from going over budget and keep a venture profitable.
Future projects – If you understand an operation cost target and are able to deliver a project at (or under) the target, you are more likely to be given the green light to embark on future projects.
Where funds are being allocated – Having an understanding of an operation cost target gives you insight as to where funds are being allocated across different sectors. This is valuable since you can see where certain areas might be overfunded or underfunded in relation to the overall cost of an entire project.
An industry example of an operation cost target
A producer of an independent film has been briefed on the operation cost target of the entire project and how that target is distributed amongst the various departments. The director of the film has an idea as to how they would like to have a pivotal scene filmed, but it would require plenty of practical effects. In order to appease the director, the producer would have to cut down on costs. Looking at all of the departments, the producer finds that by limiting trailers to just the primary actors and going with a cheaper craft services provider, they are able to allow the director to film the scene the way they want to while still not going over the operation cost target.
3 best practices when thinking about an operation cost target
Here are some great practices to consider when thinking about an operation cost target:
1. Do not go beyond it
Once it is clear exactly how much is available for operational costs, it is important to not go over that amount. Remember that it is the maximum amount allowed.
2. You can move funds from one area to another
Instead of going above the operation cost target, instead, find areas where you can trim funds and move them into others where they are needed.
3. If all else fails…ask
If you find that you have made all reasonable efforts to find creative solutions for not going beyond the operation cost target and it still isn’t enough to see the project through while maintaining quality control, be prepared to show why additional funding is needed and why it would be beneficial.
Frequently Asked Questions (FAQ) about an operation cost target
Is an operation cost target solely project-based?
No, it can be utilized in a variety of applications, including the cost to run processes.
What if there turns out to be unexpectedly incurred costs that are not reflected in the operation cost target?
Unfortunately, incurring unexpected costs can happen from time to time in a project. All that can be done is to do our best in the planning stages so that there is little left to chance.
What are some areas that can be trimmed if it appears that I am going to go over the operation cost target?
It is hard to say without looking at the individual project, but one thing to look at across every department is to see what is actually needed and what is not.
The Necessity of Having an Operation Cost Target
While crunching the numbers might not feel very fun, it is very rewarding to find that you have completed a project without going over your operation cost target. If you are able to accomplish this, it can help ensure the success of your project and lead to you being able to lead even more projects down the line.
