Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Cost Avoidance vs Cost Savings — 3 Differences

As taught in the Category Management in Procurement Course / ★★★★★ 4.9 rating
What are the differences between cost avoidance and cost savings?
- Cost savings provide immediate expense reductions, while cost avoidance stops future costs.
- Cost savings are directly measurable; cost avoidance estimates prevented expenses.
- Cost savings boost current efficiency, whereas cost avoidance lowers long-term financial risks.
Saving money is a good way to help the organization achieve its goal. With the additional savings, the organization can use it to purchase or invest in things that will make it develop more. Furthermore, cost savings and cost avoidance are the two ways for an organization to save money. However, what are these?
In this article, we will explain what cost avoidance and cost savings are all about. We will show you its essential characteristics that will help you differentiate these savings from each other.
Once you have read this article, you will have a better understanding of cost savings and cost avoidance. This will allow you which of the two is more effective for your organization. Nonetheless, it will be beneficial for your organization to save money to further its development. So without further ado, let’s check how it differs from each other.
Differences Between Cost Avoidance and Cost Savings
1. Cost Avoidance focuses on preventing potential future expenses, while Cost Savings involves concrete, measurable reductions.
2. Cost Avoidance is difficult to quantify precisely because it involves hypothetical costs that never occurred, whereas Cost Savings is easily tracked and compared across accounting periods.
3. Cost Avoidance generally does not appear in financial statements, while Cost Savings is clearly recorded and reflected in budgetary and financial documentation.
The table below shows the characteristics of both savings that make them different from each other:
Pro Tip: Don’t underestimate cost avoidance—track it through internal benchmarks and procurement justifications to highlight its strategic impact.
⭢ Want to master how to incorporate both cost savings and cost avoidance into your procurement reporting? Dive into our Category Management in Procurement Course.
Examples of Cost Avoidance and Cost Savings
Example 1: Software Development Company
A software company specializing in developing complex applications and platforms for clients across various sectors (e-commerce, banking, telecommunications) experienced a growing workload and increasingly complex projects. During development, they observed frequent bugs and security vulnerabilities, leading to costly emergency fixes and additional testing efforts.
Clients complained about software instability and occasional service interruptions, which harmed the company’s reputation. Consequently, the team had to dedicate more time and resources to correct these issues, negatively affecting delivery schedules and overall client satisfaction.
Cost Avoidance
The company decided to invest in an advanced automated testing framework and an integrated CI/CD system. By implementing this proactive strategy, a large number of potential bugs and security flaws were detected much earlier in the development cycle.
This prevented expensive follow-up interventions, emergency patches, and potentially high costs of resolving critical incidents once the software was in production. Moreover, it helped maintain strong client relationships by delivering more stable software on release.
Cost Savings
Implementing automated testing significantly reduced the need for manual testing, directly impacting labor costs. The QA team could focus on other critical aspects of quality control instead of repeatedly performing the same testing procedures.
Additionally, faster development processes and quicker releases enabled the company to allocate resources more efficiently, leading to lower operational expenses and increased client satisfaction.
Example 2: Manufacturing Company
A manufacturing firm focusing on metal components for the automotive industry faced frequent machine breakdowns. Stopping production, even for a few hours, heavily impacted the ability to meet delivery deadlines, resulting in penalties or lost contracts with key clients.
Furthermore, emergency repairs and part replacements drove up operational expenses, and it was often necessary to bring in specialized repair teams after hours, significantly increasing maintenance costs.
Cost Avoidance
To enhance production stability, the firm installed predictive maintenance sensors to monitor machine performance and identify signs of potential malfunction (e.g., vibrations, temperature, noise, pressure). These sensors allowed them to schedule maintenance and part replacements proactively rather than waiting for a breakdown to occur.
As a result, the company avoided major expenses associated with urgent repairs, unplanned downtime, and the lost revenue that typically follows missed delivery deadlines.
Cost Savings
In addition to reducing emergency repairs, the sensor data enabled more efficient machine operation and better-planned downtime. This led to lower energy consumption, as the machines ran under optimal conditions, and maintenance activities were more strategically scheduled instead of performed blindly.
Consequently, the company realized tangible savings on energy bills and reduced both regular and emergency maintenance expenses. Moreover, improved productivity increased delivery capacity and drove faster revenue growth.
Cost Avoidance Explained
Cost avoidance is a measure that decreases potential increased expenses as a way of lowering the organization’s future costs. To simplify, it is the actions that an organization does to avoid incurring costs in the future.
In cost avoidance, all actions are done to reduce future costs. For example, the organization may spend regularly to maintain the condition of the machines used in production.
Failing to maintain the machines may accelerate their deterioration which could lead to more expensive repairs or worse, needing to replace them.
Letting the employees work on unmaintained machines could increase the chance of accidents happening in your organization which will go far behind the cost of simply repairing the machines.
Any preemptive actions that the organization will do to avoid cost increases in the future are called cost avoidance.
Cost avoidance is not something that you can see or measure in the financial statements or budget of the organization.
Investing in new technology is the most preferable and the winning choice in cost avoidance. This is due to the fact that it eliminates spending on compensation now and in the future.
Cost Savings Explained
Cost savings is a measure that directly reduces current expenses, resulting in a tangible decrease in the organization’s spending. In simple terms, it encompasses actions that an organization takes to lower its present costs.
For instance, a company might renegotiate its supplier contracts to secure lower prices for raw materials, leading to a measurable reduction in operational expenses.
Cost savings are evident in the organization’s financial statements and budget, as the reduced expenditures can be directly tracked and quantified over time.
Any steps taken by the organization that result in a clear, immediate reduction in costs—whether through process improvements, bulk purchasing, or energy efficiency measures—are considered cost savings.
By focusing on cost savings, an organization can enhance its profitability and allocate resources more effectively, as the benefits are immediately observable in its financial performance.
More Example of Cost Savings
To further understand Cost Savings, here are a few examples:
1. Partnerships
Partnerships help companies to reduce their costs. For example, partnering with a cloud service provider will get rid of the necessity to build and maintain a computing infrastructure on-premise.
2. New Contracts and Contract Renewals
When a contract is negotiated, there is a potential for cost savings. The procurement department can work with potential suppliers to get the best deal whether it is from a reduced overall price for longer contracts or through value-added services.
Having a contract will help organizations to avoid price increases in the long run by locking in a discount for several years.
3. Price Negotiations
Price negotiations are another area where procurement can make a huge difference in the budget. For example, if the organization is buying a fixed amount of goods but needs to increase the volume, it may be able to negotiate with the supplier to get a lower price per unit.
Calculating Cost Savings
For you to calculate your cost savings, take the pre-negotiated cost and subtract it from the final contracted cost. The result will be the number of your cost savings. Here is an equation for you to visualize more:
Pre-negotiated cost – final contracted cost = cost savings amount
If you want to calculate it as a percentage, then here is an equation for you:
Pre-negotiated cost – final contract cost = difference
Difference pre-negotiated cost = Cost savings percentage
Ways to Maximize Cost Savings
Maximizing Cost Savings is what any business aims. Here are a few ways to maximize cost savings:
1. Outsourcing
Outsourcing is becoming a huge trend due to its cost-saving opportunity. Outsourcing can help businesses to cut their operational costs. It proves to be beneficial to small businesses that do not necessarily need full-time employees to effectively run their business.
2. Technology
Many businesses utilize technology due to its capability to lower operational costs and maximize cost-savings significantly. There are numerous online software and solutions that can help your company perform some tasks in your company.
By saving the daily manual efforts of employees into mundane tasks, they can instead focus on using their time to improve productivity in other areas within your business.
3. Lower your marketing costs
Traditional marketing costs have become outdated. There are new forms of advertising that will reach more customers without spending too much on your marketing strategy.
Rather than hiring a traditional marketing agency, your company may use the internet, particularly social media platforms to reach its target audience and gain new customers.
Conclusion
In conclusion, cost avoidance and cost savings offer distinct approaches to financial management. Cost avoidance involves proactive measures to prevent future expenses, often challenging to quantify and not reflected in financial statements.
On the other hand, cost savings yield tangible benefits, readily measurable and visible in financial records. Embracing strategies such as partnerships, technology utilization, and marketing efficiency can maximize cost savings, contributing directly to budgets and financial statements.
Understanding these differences empowers organizations to strategically choose between cost avoidance and cost savings for effective financial development.
Frequently asked questions
What is cost avoidance?
Cost avoidance refers to the action that an organization does to avoid incurring costs in the future.
What is cost savings?
Cost savings are more inclined with the actions of the organization that decrease debt levels, current spending, or investment.
What are the main differences between cost avoidance and cost savings?
Cost avoidance does not appear in the financial statements and budget. On the other hand, cost savings are reflected in the financial statements and budget of the organization.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.