Cost control is weakest when it starts after the organisation has already made the design, scope and operating decisions that determine what the project will cost over its life.
Executives often see cost as something that appears during delivery: purchase orders are raised, contractors invoice, labour hours accumulate and the project reports variance against budget.
By that stage, much of the economic outcome may already be embedded in earlier choices.
A machine's maintenance requirement is influenced by its design and specification. A building's operating cost is shaped by layout, systems and materials. A digital platform's support burden is affected by architecture and integration decisions. A service project's cost base is influenced by customer expectations, skill mix, quality requirements and workflow design before delivery begins.
Cost is not only spent during execution. Cost is committed through decisions.
The Strategic Context
The supplied project-costing thesis reviews several approaches to cost management, including activity-based costing, target costing, lifecycle costing and value analysis. Its treatment of lifecycle cost is particularly important because it extends the decision beyond acquisition price to development, production, operation, support, maintenance and disposal.
The thesis also highlights a familiar principle from target costing: significant lifecycle cost can be shaped during design and development, when choices remain more reversible. The source cites literature suggesting a very high proportion of lifecycle cost may be determined in these early stages. Because the exact percentage is source-dependent, ERANORTH should not generalise it as a universal constant. The strategic point, however, is well supported: early decisions strongly influence later cost.
This changes the executive role in cost governance. Leaders should not ask finance only to report whether spending is within budget. They should ask whether the system being designed can operate economically across its intended life.
What Leaders Commonly Misread
The first misread is purchase price as total cost.
A lower-cost asset may require higher energy consumption, more maintenance, specialist spares, longer downtime or earlier replacement. A higher acquisition price can sometimes reduce lifecycle expenditure. Without a lifecycle view, procurement savings can become operating losses.
The second misread is budget compliance as cost optimisation. A project delivered within its approved capital budget can still create an expensive operating model. The project team may be rewarded for protecting CAPEX while the receiving business inherits OPEX for years.
The third misread is standard costing as universally appropriate. The service-sector case in the supplied thesis argues that project specifics, customer expectations, resource requirements and quality needs can vary enough that a single costing method may not fit all assignments. This is especially relevant where effort is people-intensive and outputs are less physically measurable.
The fourth misread is cost control as retrospective explanation. Variance reports show where spending differs from plan. They do not necessarily reveal the design decisions that made the cost unavoidable.
The fifth misread is removing cost without testing value. A cost can be eliminated because it is waste—or because the organisation has removed a capability, quality control or resilience mechanism whose value was poorly measured.
Reframing the Issue
The better question is:
At what point in the lifecycle can we still change the cost economically?
This reframes project cost management into three connected disciplines:
- cost design: shaping scope, architecture and specifications before commitment;
- cost visibility: understanding which activities and resources actually create cost;
- cost control: comparing plan with actual and intervening while meaningful choices remain.
Each has a different timing.
A mature organisation moves effort upstream. It spends more attention when decisions are reversible and less effort explaining overruns after commitments are locked in.
Strategic Analysis: Lifecycle Cost Changes the Procurement Question
Traditional purchasing asks, “What does it cost to buy?”
Lifecycle thinking asks, “What does it cost to own, operate, support and exit?”
The supplied thesis describes lifecycle cost as including research and development, production, operation, support and disposal. It also positions lifecycle costing as a means of comparing alternatives and exposing future expenditure profiles, financial risk and uncertainty.
For an engineering asset, a lifecycle comparison might include:
- acquisition and installation;
- commissioning and training;
- energy or consumables;
- planned maintenance;
- expected unplanned downtime;
- spare parts and specialist support;
- software or licence costs;
- upgrades or mid-life overhaul;
- decommissioning and disposal.
Not every item can be forecast with precision. The point is to make the economic tail visible before selecting the asset.
The same logic applies to technology. A “cheap” application can become expensive through integration, security, support, data migration and vendor dependency. A cloud service can shift costs from capital expenditure to recurring operating expenditure without reducing total economic commitment.
Strategic Analysis: Target Costing Moves the Conversation Upstream
Target costing begins with the economic constraint rather than accepting whatever cost emerges from the design.
The supplied thesis frames target costing as part of strategic profit management, particularly during design and development. The practical logic is powerful: if the market, customer or enterprise economics only support a certain lifecycle cost, design must converge towards that constraint before the organisation commits to an unaffordable solution.
This is different from cost cutting.
Cost cutting asks what can be removed after the solution is largely defined. Target costing asks what solution can deliver the required value within the allowable economics.
For executives, that distinction matters. The first tends to create late compromises. The second makes trade-offs explicit while the architecture can still change.
Strategic Analysis: Activity-Based Costing Reveals the Costing System
The thesis also reviews activity-based costing as a way to associate costs with activities and cost drivers rather than relying solely on broad allocation methods.
The strategic value is visibility.
A service organisation may discover that a supposedly profitable customer consumes disproportionate rework, project management, custom reporting or specialist review. A manufacturing business may find that small production batches create setup, scheduling, quality and material-handling costs that standard unit costing obscures.
The decision implication is not that every organisation should implement a complex activity-based costing system. It is that cost models should reflect the operational mechanism that actually consumes resources.
Related article: What the NPV Spreadsheet Is Hiding From the Executive Team
Decision Framework
For material investments, use a five-stage cost architecture.
1. Define the value requirement.
What outcome, performance and quality must the investment deliver? Cost cannot be optimised without knowing which value must be protected.
2. Establish the lifecycle boundary.
Decide which development, acquisition, operation, maintenance, support and end-of-life costs belong in the decision.
3. Identify cost drivers.
Which design choices, activities, volumes, service levels, interfaces and resource requirements create the cost?
4. Compare alternatives before commitment.
Use target costing, lifecycle comparisons, value analysis or other appropriate methods while major choices remain reversible.
5. Control committed cost during delivery.
Track actual versus planned cost, but link variances back to the decisions and drivers that created them.
This turns cost management from accounting surveillance into design governance.
From Strategy to Execution
Immediately, capital requests should include lifecycle-cost assumptions where operating and support expenditure is material. Procurement comparisons should identify major recurring costs rather than displaying purchase price alone.
In the medium term, engineering, operations, procurement and finance should participate in early option selection. A cross-functional team can identify costs that sit outside the project budget but inside the enterprise economics.
For service businesses, costing methods should be proportional to complexity. The supplied thesis warns that one method may not suit every project because resource needs and customer expectations vary. The answer is not to abandon standardisation. Standardise the costing logic and minimum data requirements while allowing the method to scale with project complexity.
Longer term, organisations should create a feedback loop from actual lifecycle performance into future investment decisions. Maintenance cost, support hours, energy use, rework and disposal experience should update the cost assumptions used in new designs and business cases.
Related article: A Profitable Project Can Still Create a Cash Crisis
Signals to Monitor
Watch for:
- procurement decisions dominated by acquisition price;
- projects that meet CAPEX targets but cause unexpected OPEX growth;
- recurring “unforeseen” maintenance or support cost after handover;
- value engineering that begins only after the budget is exceeded;
- standard cost rates that do not reflect resource-intensive customers or products;
- project cost reviews disconnected from design decisions;
- finance discovering lifecycle obligations only after contracts are signed.
These are symptoms of late cost management.
Source Notes
The principal source is Azadi Fırat Kaya, Project Costing in Project Management: Service Sector Case, master's thesis, Kaunas University of Technology, School of Economics and Business (2018). The thesis synthesises earlier literature on lifecycle costing, activity-based costing, target costing and value analysis and includes a single service-sector case; its case findings should not be generalised beyond their evidential scope without further support.
Questions for the Leadership Team
- Which of our current investments were selected on purchase price rather than lifecycle economics?
- What major operating costs are routinely excluded from project budgets but borne by the business after handover?
- At what stage do our projects make the decisions that largely determine future cost?
- Are target costs used to shape design, or only to pressure suppliers after specifications are fixed?
- Which customers, products or services consume more activities than our current costing system reveals?
- How do actual maintenance and support costs update future investment assumptions?
Closing Perspective
Finance can report the invoice, but the invoice is often the end of a decision chain that began months or years earlier.
The stronger management system governs cost when cost is still changeable: during requirements, architecture, option selection, specification and commercial design. Lifecycle costing broadens the boundary; target costing moves discipline upstream; activity-based thinking exposes the operational drivers beneath averages.
The objective is not to minimise every cost. It is to design the lowest sustainable cost system that still delivers the required value, quality, resilience and performance across its life.