Cost avoidance vs cost savings: why avoidance is not a P&L saving
Both numbers matter, for different purposes
By Alexandre Lio, founder of The Procurementor, ex-Amazon EMEA and ex-Cellnex
Last updated:
Cost avoidance is a spend increase that procurement prevented: spend rises less than expected, but it does not go down. A hard saving, by contrast, reduces spend the company already had and reaches the P&L.
Both are legitimate. Adding them together without telling them apart is the first thing a CFO will refuse.
Two definitions
- Hard saving (cost saving): spend the company really had, and that goes down. A unit price renegotiated downward, a contract terminated. It shows in the budget, then in the P&L.
- Cost avoidance: an increase that would have happened, and that is reduced or cancelled. A price rise brought down from 8% to 3%, an indexation clause removed. Actual spend does not fall; it rises less.
Sievo's guide to procurement savings uses the same split: the savings reported to finance are the hard savings, and cost avoidance is often called soft savings (Everything you need to know about procurement savings).
Worked example: one contract, two outcomes
A maintenance contract worth €200,000 a year comes up for renewal. Two scenarios, each worth €10,000 of procurement result:
| Case A: increase limited | Case B: decrease obtained | |
|---|---|---|
| Last year's spend | €200,000 | €200,000 |
| Supplier's request | €216,000 (+8%) | None |
| Spend after negotiation | €206,000 (+3%) | €190,000 |
| Procurement result | €10,000 of cost avoidance | €10,000 hard saving |
| Effect on the budget | +€6,000 | −€10,000 |
In case A the buyer did real work: without it, the company would have paid €216,000. But the budget line goes up by €6,000. If that €10,000 is presented as a saving, the CFO will look for it in the P&L and not find it. The doubt then spreads to the hard savings, which were real.
Hard saving and cost avoidance, side by side
| Criterion | Hard saving | Cost avoidance |
|---|---|---|
| Baseline | Actual past spend | The spend that would have occurred |
| Effect on the budget | The line goes down | The line does not go down |
| Visible in the P&L | Yes | No |
| Evidence | Invoices before and after | The supplier's written increase request, a market index |
| Reporting | In the reference total, once validated | Separately, never added in |
How to calculate and document cost avoidance
Cost avoidance = (increase requested − increase accepted) × baseline spend.
In the example: (8% − 3%) × €200,000 = €10,000. The hard part is not the arithmetic, it is the evidence: no invoice shows what the company did not pay. Three documents make an avoidance defensible:
- The supplier's increase request, written and dated, or the market index that justified it.
- The outcome of the negotiation: signed contract or amendment.
- The baseline spend the increase would have applied to.
Without the first document, the avoidance is only an assertion. That is why finance validates every line against evidence.
Three borderline cases
- The first purchase. With no past spend, there is no hard saving in the strict sense. A price obtained below the approved budget becomes a hard saving only if the budget is actually reduced; otherwise it is avoidance.
- Contractual indexation. An increase provided for by an index clause and negotiated down is avoidance: spend still goes up.
- The drop in volume. It is neither. The company consumed less; the credit goes to demand management, and the line is not claimed as a price saving.
When in doubt, the question to ask is simple: will spend on this line be lower than last year? If so, it is a hard saving. If it is only lower than what was announced, it is avoidance.
Why keep them apart
- Finance recognises only hard savings in the P&L; avoidance is a steering figure, not a result.
- A total that blends the two inflates the number and casts doubt on everything else.
- A well-documented avoidance is still performance: it deserves its own line, not a disguise.
How the tool enforces it
Every savings line carries a type: “hard saving” or “cost avoidance”. Dashboards and exports always show the two separately, so nobody can display a total that adds them up. It is the second of the five rules of the procurement savings methodology.
Frequently asked questions
Is cost avoidance a saving?
It is a real procurement result, but not a saving in the accounting sense: spend does not go down, it rises less than expected. It is tracked and reported separately.
How do you calculate cost avoidance?
Multiply the gap between the increase requested and the increase accepted by the baseline spend. An 8% rise brought down to 3% on €200,000 is €10,000 of cost avoidance.
Should cost avoidance be reported to finance?
Yes, on a separate line and with its evidence. Hiding it deprives procurement of a real result; blending it with hard savings discredits the whole report.
What is the difference between hard savings and soft savings?
Hard savings are spend reductions that show in the P&L. Soft savings usually mean cost avoidance and other gains that do not directly reduce a budget line.