Why Cost-Overruns May Mean Extra Budget, but Little Profit for Anyone


Quality control must be the watchword for any organization that manufactures APIs and other chemicals.

Aside from required FDA guidelines, this can mean different things to different organizations.

What is key, however, is an unwavering commitment to ensuring quality in every phase – from clean room operations, to calibration of instruments and preventative maintenance in utility systems. It’s essential that companies have processes and controls that help meet their own strict standards, as well as industry regulations.

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Yet, while quality control is a given and experience is important, there will always be problems that arise in the lab or plant that derail even the best-laid plans. Many are out of the control of anyone – bad raw materials, equipment malfunction or the chemistry can simply not behave at larger scale despite good batches earlier in the Kilo Lab.

While such problems require that sponsoring firms pay additional fees to the Contract Manufacturing Organization (CMO), it’s not something that CMOs can bank on. In fact, they strive to avoid cost overruns, for the following reasons:

They derail the project pipeline.  When one project goes over expected completion dates, it pushes back all other projects in the pipeline, creating a huge headache for management, which must explain why other projects can’t begin on time.

Not only does it affect current project schedules, but it may affect projects in the pipeline. Extending a project may generate a small cost-overrun, but the CMO may have to turn away a huge project because of the backlog

They derail equipment schedules. When a cost-overrun occurs, it is easy to add additional chemists to the job, yet equipment and vessels in the plant are under a carefully orchestrated usage schedule.  Such equipment may be scheduled for different projects, and a delay in one project can create a cascade of delays, throwing off the schedule completely.

So, what can CMOs and sponsoring companies do to lessen the effects of cost overruns?

  1. Anticipate the cost of project overruns. When developing scope of work proposals, it’s a good rule of thumb to let clients know that they should plan for 25-percent overage costs. It’s always a plus when this does not happen, but it helps to set realistic expectations.
  2. Establish regular communication. The most important part of a CMO-client relationship is communication. By having project managers communicating weekly with clients to provide project updates and to discuss challenges and strategies, there are no surprises when problems occur and there may be time to address problems or together determine the best course of action.
  3. Provide the CMO with all the background. In order to avoid problems, it’s important that sponsors share all relevant information about the project and what may have been done previously. For example, if the sponsor previously contracted with an overseas firm for batch processing, any information on the duration of time it took to run the chemistry would be helpful in providing a more accurate estimate of timeframes. Also, any abnormalities that were noted in the plant previously would help in anticipating possible issues going forward
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In the end, CMOs grow their business by helping APIs and other chemical entities become commercialized and solve critical healthcare needs. Cost overruns only delay the goals of CMOs and their sponsors, so sound attention to what can be done to prevent them, and sound action to address what is out of their control is key.

Delays and overruns do happen, despite careful planning. The goal of this, and the other articles in this blog is to provide some insight into important issues related to API manufacturing, to make things more transparent. If you have any questions about this or how we strive to work smarter and more collaboratively with our sponsors, please call us at (978) 462-5555.