As a buyer, understanding the intricacies of Recurring and Non-Recurring Costs is crucial in order to make sound business decisions is important. In this blog post, we’ll dive into the definitions of RC (Recurring Cost) and NRC (Non-Recurring Cost), how they influence business deals, and what aspects to consider when assessing these costs.

What are Recurring Cost (RC)?

Recurring costs are ongoing expenses that a company incurs regularly, either monthly, quarterly, or annually. These costs are predictable and typically include expenses such as rent, utilities, salaries, insurance, and maintenance fees. For buyers, accurately estimating recurring costs is essential in determining the true cost of ownership and evaluating the sustainability of a business deal. In a sourcing project recurring cost will typically be the price of the item purchased.

What are Non-Recurring Cost (NRC)?

Non-recurring cost, on the other hand, are one-time expenses that a company incurs infrequently. These costs can be unpredictable and are often associated with specific projects, acquisitions, or expansions. Examples of non-recurring costs include initial setup fees, equipment purchases, and special training for employees. As a buyer, understanding non-recurring costs is vital in order to determine the feasibility of a project or investment. In a sourcing project tools and development costs are typical examples of NRC.

Influencing Factors when balancing NRC and RC

Cash Flow Projections: In any business deal, it’s essential to have accurate cash flow projections. By understanding the balance between recurring and non-recurring costs, buyers can identify potential financial strains and assess the long-term viability of a deal. When moving (in the price model) cost from upfront NRC to RC, buyers get the benefit of postponing cash transfer and save operating capital.

Long-term vs. Short-term Commitments: Recurring costs often represent long-term commitments that are difficult to change or eliminate, while non-recurring costs are usually more manageable in the short term. Buyers must weigh the implications of these commitments and factor them into the overall cost of ownership when evaluating a deal. 

Cost Savings and Optimization: By identifying areas where recurring costs can be reduced or eliminated, buyers can often achieve significant cost savings. Similarly, understanding the nature of non-recurring costs can help buyers negotiate better terms, such as spreading the costs over a longer period or securing discounts for bulk purchases. 

Risk Management: Understanding the balance between recurring and non-recurring costs can help buyers better manage risks. For example, a business with high recurring costs and low non-recurring costs might be more vulnerable to economic downturns, whereas a business with high non-recurring costs and low recurring costs might be more susceptible to unexpected changes in the market or industry. In a project, when managing cost upfront as NRC all informal information is available related to that specific project. Documenting the background and assuring future understanding of the business deal is important 

Converting NRC to RC 

When deciding the optimal arrangement in a sourcing project, professional buyers often need to determine the most appropriate way to handle non-recurring costs (NRC) and recurring costs (RC) in the agreed price model. One option is to convert NRC into RC, which has its own set of pros and cons.

Pros of Converting NRC to RC:

• Lower Initial Investment: By converting NRC into RC, the initial investment for the project is reduced. This can make it easier to secure budget approval and facilitate faster project implementation.
• Improved Cash Flow Management: Spreading NRC over the contract’s duration as part of the RC helps in better cash flow management. This can be especially advantageous for businesses with limited financial resources or those that prefer to maintain cash reserves for other purposes.
• Risk Sharing: Converting NRC to RC can help share the risk between the buyer and the supplier. The supplier may be more willing to invest in necessary development costs upfront, knowing that they will be compensated through higher recurring payments over the contract term.
• Simplified Budgeting: Including NRC in the RC simplifies the budgeting process for the buyer, as they only need to account for a single, regular expense rather than dealing with a separate, one-time cost.

Cons of Converting NRC to RC:

• Higher Total Cost: Converting NRC to RC can result in a higher total cost over the contract period, as suppliers may charge a premium to compensate for the initial investment they make in development costs.
• Reduced Flexibility: By incorporating NRC into the RC, the buyer may be tied to a long-term contract with the supplier, which could limit their flexibility to renegotiate terms or change suppliers if the situation demands it.
• Vendor Lock-in: As NRC is spread over the contract term, the buyer may become dependent on the supplier, which can lead to vendor lock-in. This can make it more difficult for the buyer to switch suppliers in the future, as they may need to pay another NRC to a new supplier.
• Incentive Misalignment: Spreading NRC over the contract term may reduce the supplier’s incentive to complete the development work quickly or efficiently, as their revenue is guaranteed through the recurring payments.

Conclusion: Recurring and Non-Recurring Cost

In conclusion, converting NRC to RC in the agreed price model has its pros and cons. While it can lower initial investment, improve cash flow management, and simplify budgeting, it can also lead to higher total costs, reduced flexibility, vendor lock-in, and misaligned incentives. As a professional buyer, it’s essential to weigh these factors carefully to determine the best approach for your specific sourcing project and understanding the balance between recurring and non-recurring costs is crucial in making informed business decisions. By considering cash flow projections, long-term commitments, cost savings, and risk management, you’ll be better equipped to evaluate the true cost of ownership and the overall sustainability of a business deal.

Learn more about the Project buyer. The Project Buyer role is more advanced than one might think. It take skills as manager, tactical buyer and operative buyer to complete the daily tasks. And a strong project management understanding.

Note: Illustration created by DALL-E on April 22, 2023.

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