Introduction
For most CFOs, controlling costs is not just a responsibility; it’s the bedrock of strategic decision-making. But there’s one area where even seasoned finance professionals face tension: the gap between quotation costing and actual costing.
While quotation costing is built to win business, actual costing tells the truth about profitability. And when the gap between them goes unnoticed, margins quietly erode, deals turn unviable, and cost leakage becomes systemic.
In this blog, we break down the difference between quotation and actual costing from a CFO’s point of view, and how bridging the gap can protect profits and improve pricing strategies.
What is Quotation Costing?
Quotation costing refers to the estimated cost provided during a proposal or bidding stage. It includes:
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Material cost estimates.
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Labor assumptions.
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Overhead allocations.
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Tooling or development costs.
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Risk contingencies.
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Profit margin.
Purpose:
To price a product or service competitively while maintaining profitability, on paper.
Challenge:
Many assumptions are based on past averages, best-case scenarios, or incomplete supplier feedback.
What is Actual Costing?
Actual costing captures the real, incurred costs after production or service delivery. It reflects:
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Real material prices paid.
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Actual labor hours and rates.
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Scrap, rework, or inefficiencies.
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Freight, logistics, and taxes.
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Updated overhead absorption.
Purpose:
To measure true profitability and variance from plan.
Challenge:
It comes after the fact—too late to change the deal, but crucial for future corrections.
CFO’s View: Why the Gap Matters
From the CFO’s chair, the variance between quoted and actual cost is a hidden source of value loss. It affects:
1. Margin Dilution
Your business may be winning deals, but losing profit. A quoted 15% margin may shrink to 3% or even turn negative once actual costs come in.
2. Forecasting Inaccuracy
Over-optimistic quotations skew revenue and profit forecasts, leading to unrealistic budgets and poor capital allocation.
3. Product Cost Control
Quoting from outdated BOMs or templates causes cost creep. Without visibility into actual consumption and process deviations, product cost control becomes guesswork.
CFO Strategies to Manage the Gap
1. Implement Closed-Loop Cost Feedback
Create a feedback loop between the actual costing and quotation teams. Every large order should undergo a post-mortem analysis comparing the estimated cost to the actual price. What we planned vs. what happened?”
This data is gold for refining future quotations.
2. Use Should-Cost Models
Move beyond supplier quotes or thumb rules. Build should-cost models using current commodity prices, labor rates, and benchmark data. These models empower negotiation and prevent over-quoting or underestimating.
3. Set Acceptable Variance Thresholds
Establish red flags for cost variance—say, ±5% between quoted and actual. Anything beyond that triggers a root-cause analysis led by finance, operations, and sourcing.
4. Digitize the Quotation Process
Use quotation software that pulls real-time cost data from ERP, inventory, and procurement platforms. Eliminate manual costing done on outdated Excel sheets.
5. Link Quotation Accuracy to KPIs
Incentivize sales, costing engineers, and project managers based on quotation accuracy, not just order wins. This drives ownership and discipline.
Real-World Example
Company: Tier-1 automotive component supplier
Situation: Quoting tool cost at ₹8,00,000 during RFQ; actual tool development cost hit ₹12,30,000 due to missed tolerance specs
Impact: Margin on a 5-year contract dropped from 11% to 2.5%
Lesson: Technical and cost teams must be aligned during the quotation phase, not after the award.
Turning Quotation Costing into a Strategic Asset
Quotation costing isn’t just a sales tool; it’s a financial weapon when done right. CFOs who treat it as a dynamic, data-informed process, not a static estimate, are better positioned to:
1. Win profitable business.
2. Control cost escalation.
3. Make informed investment decisions.
4. Support pricing with confidence.
Conclusion
For CFOs, the battle for profitability is often won or lost at the quotation stage. Closing the gap between what’s quoted and what’s spent isn’t just about better math, it’s about building discipline, transparency, and accountability across the cost chain.
A company that masters quotation accuracy doesn’t just protect margins—it builds pricing credibility, customer trust, and long-term sustainability.
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