What are Set up Costs
Set up costs are a manufacturing term that describe the initial outlays required to prepare a factory to begin production. They include readying machinery, positioning raw materials and arranging the layout of the production facility. These costs are typically charged to the units of product manufactured.
For a service based company “set up cost” is the cost of training assigned staff to properly perform the required work. Unlike traditional manufacturing set up costs, these service based set up costs are often overlooked. These costs can vary widely based upon the fit between the skills required to effectively complete a project and the assigned staff’s prior experience. If overlooked, these costs can significantly depress a service company’s profitability.
Knowing your set up costs can improve your company’s project profitability
Overcome the toll unexpected set up cost can take on your company’s project income by doing the following:
- Measure your start-up cost
Begin with an assessment of the similarity of your company’s projects. A company with highly similar project work would be one that installs residential concrete driveways. At the opposite extreme would be a company that develops equipment for outer space travel involving a wide range of new technologies from propulsion to biomechanics. Based upon the level of similarity between your projects, identify any employee knowledge gaps and the training required to address them.
- Identify needed training and development
Required training and development can range from in-house to formal course work. Determine the cost and time required for your staff to secure the needed training. Of course if in depth specialized knowledge is needed that is not available within your workforce subcontracting or hiring individuals with the needed skillsets may be required.
- Include your total startup costs in your project costs
The profitability payoff of tracking your set up costs will be come from more effective bidding and planning. Bidding based upon a more accurate estimate of total project cost will minimize the risk an excessively low bid based upon underestimated project cost. Knowing your project startup costs can improve profitability through staffing it with the most knowledgeable employees or subcontract expertise and advance scheduling of required training.
To maximize the profitability of your service based company be sure to track your set up costs.