What is Cost Containment?

Cost containment involves tight control over expenses to ensure that the total amount of expenditures does not exceed the budgeted amount. An effective cost containment program requires the active oversight of management, as well as a budgeting process that yields reasonable expenditure targets. When engaged in cost containment activities, it is essential not to pare away too deeply at the structure of a business, since this will impair its long-term ability to compete. Cost containment is especially important for a government or nonprofit entity, which may not be able to easily increase its revenues to offset increased expenses.

Disadvantages of Cost Containment

A downside of cost containment is that management focuses too much on the cost side of the business, rather than pursuing new revenue opportunities. This can result in a long-term decline in the prospects of a business, when it could have branched out into new products and services if management had been willing to spend more money.