Price It Out

April 13, 2006

	Visited: 252
	Not rated
	Rate:

This is the one step in the contracting process where you are the expert and we are not. Given that there are so many different types of businesses out there and so many different ways of pricing, our best advice is to be as competitive as possible.

The old stories of $200 toilet seats and $300 hammers are simply that, old history, and you better believe that you have to sharpen your pencil as much as possible in order to be competitive.

Common Pricing Factors. At the same time, however, you also need to make sure that you cover all of your costs and protect your profit. Here are some things to consider in determining your price:

Consider Pricing History: You can often get pricing history from the buying office by asking the Point of Contact identified in the contract (Block 10 if you are using Form SF 33). You can also contact a Procurement Technical Assistance Center and ask it to run a computer review of pricing history for an item. If you are bidding on a service, it becomes more difficult to get good pricing history. Ask the contracting officer to provide you with the previous contract number so you can obtain the contract. Make sure the statement of work is the same as yours so you can make a fair price comparison.
Cost Out All Special Requirements: The buyer may ask for many costly extras. Especially watch out for packaging requirements, they can be expensive. Don't just stick on a percentage of the cost of the item to cover packaging.
Think Carefully about Quality Requirements: Will any of the certifications and acknowledgments add on extra costs? (See our discussion of quality assurance standards.)
Factor in Bidding Costs: Some offers are rather simple and straightforward, but as the value of the contract increases, more time and labor are usually required. As a general rule of thumb, you can estimate that the cost of putting together an offer will run 3 to 4 percent of the value of the proposed contract. Make sure current finances can handle that cost.
Don't Forget Overhead and Profit: Make sure your profit is reasonable. Remember that the bidding process is very competitive. You are free to figure in as high a profit as you wish, but you must win the contract to enjoy it. Never bid if it doesn't make good business sense. And while making sure that your price covers your overhead costs may seem very basic and obvious, it is the pricing factor that small businesses most often get wrong, to the detriment of the company: If your cost information is not correct, you can't accurately bid a contract, be competitive, or make good decisions for your company.

Determine Your True Costs. Why do we say that small businesses tend to get their cost information wrong? Simply because many, if not most, small businesses don't really know what their overhead costs are.

Often, when pricing out a project, businesses will simply take their prime costs (labor and materials) and mark that figure up by some arbitrary percentage that they believe is sufficient to cover all indirect costs and give them some profit. Or they will use a single, company-wide rate applied on only one type of base, such as direct labor hours or engineering hours, for assigning indirect costs to the product or service provided. In either case, if this estimated percentage is higher than what their overhead really is, it affects their ability to be competitive. If their estimate is lower than what their costs really are, it affects their ability to be profitable.

If your business falls into one of these categories, we strongly recommend that, before you bid on a contract (or on any other project for that matter), you take the time and the steps necessary to determine your actual costs.

You might consider using some form of activity-based costing (ABC) to accomplish this. ABC, in its simplest terms, is a cost management method that allows a business to determine the actual cost associated with each product and service. With this method, you look at every item and activity in your business associated with putting out your product or service (e.g., heats, light, administrative help, sending out an invoice, doing payroll, etc.) and then attach a cost to it. In other words, you break your costs down to their least common denominator so you know what they really are.

Without knowing your true costs, you can never be sure where money is being made or lost, you can't identify moneymakers and losers (an increase in sales does not necessarily mean an increase in profit), and you can't make good strategic decisions and plans for your company.

Although ABC is geared toward a large business, a small business can adapt this philosophy and utilize a more simplified form of it. For more information on ABC, try searching the Internet or check out some of the books on the topic in your bookstore or online.

Warning

Caution

Federal Acquisition Regulation Part 15 discusses negotiations and costs for contracts of $100,000 or more and looks at allowable and allocable costs. If you are going to be submitting a proposal over $100,000, either bone up on the FAR in this area or get an accountant who is familiar with government contracting.

Again, we want to remind you to carefully read the solicitation and make notes on points you don't understand. Then go ask the questions. Go to the buyer or Point of Contact identified in the contract, the small business specialist at the buying office, or a Procurement Technical Assistance Center. But please ask someone! The answers could significantly affect your price, and your profit.