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An overnight cost is a type of construction project cost that reflects the expense of managing a project without the need to finance those expenses and pay interest. The general idea is that all resources are in hand and are paid for without the need to borrow funds from a lender and gradually retire the debt over the life of the construction or even after the construction is complete. For this reason, interest on loan balances are not included in the calculation of an overnight cost.
The same general concept can be translated into any number of financial situations. When building a new home, consumers who have the funds to do so are essentially incurring an overnight cost that does not require the aid of a mortgager or builder’s loan to manage the task. A utility that has the resources on hand to pay for the services provided to customers without requiring assistance to pay for those services can be said to operate with an overnight cost. In just about any situation in which an operation can proceed without the necessity of incurring interest can be said to have some type of overnight cost.
Calculating overnight cost is often a good idea because it provides insight into how much money can be saved if there is no need to repay interest. For example, a consumer who wishes to buy a home and could do so by liquidating a few assets may compare the losses incurred by selling those assets versus the increased expense of financing the building and paying interest on a loan over an extended period of time. Should the overnight cost be significantly less in terms of both the losses incurred by not holding onto those assets and the interest due on the financing, he or she may decide that selling off those assets to cover the cost of construction is in fact the most cost-effective way to go.
Businesses in general can use an overnight cost strategy to help remain within an operating budget and minimize the need to seek outside financing as a way to cover costs. When operational costs are increasing while revenue is remaining fairly static, this indicates that the overnight cost is increasing. In order to deal with this situation, businesses are likely to identify ways to trim operational costs so that the potential for needing to borrow money to keep going is kept to a minimum.
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