No doubt you have agonised over the conflict between setting a winning price in your Tender or Proposal, and one that will give you your targeted Profit.
I addressed one side of this conundrum in an earlier article, “When Quoting, is Price the Only Thing”. In that article, I discussed the question of the “Evaluation Process”, which in Australia seeks to determine the best “Value for Money” (VFM), how to best meet the Assessors requirements for value.
Price is always part of the equation, but only part of it. However, in developing your tender response or proposal, you also need to establish your baseline price.
Back in my aerospace industry days, we were never allowed to submit a major Quotation or Proposal without establishing our Minacc (Minimum Acceptable Price), the price at which we would walk away.
For some businesses, the majority of their income comes from quoted or tendered situations. And very nerve-wracking it can be. Have you ever been in a situation when you have been advised that your Tender was successful, and your first thought was either “I must have quoted too low!” or “What did I leave out?”
That thought reflects a problem, an emphasis on price and price alone in your Tender.
Quoting or tendering is required in more complex situations where there may be a number of variables or unknowns. Typically industries that face formal quoting or tendering include landscaping, earthworks, building and construction, fabrication, repairs and maintenance, plumbing & electrical works, manufacturing non-standard products or 'one-offs', and professional services such as graphic design, IT, legal, accounting, consulting, engineering etc.
The desired results may be delivered in different ways. They usually involve a combination of labour and materials and possibly sub-contract and equipment hire. Professional services usually involve labour only but may have a sub-contract element.
Of course, you may be asked to quote on supply of standard items in which case the purchaser is looking for the best possible price and delivery, so you are back to the tactics discussed in the article above.
There’s more to a quote or tender than just the price even in that situation, or there should be if you want to improve your chances.
In this article, I’ll look at how to establish your Minacc, and how to avoid the common mistakes people make in quoting.
Do you know your Minacc?
Quoting is usually to a specified requirement, the "specifications". These may be generalised or involve detailed drawings and/or instructions. The specifications should include the outcome required, the quantities involved, and the delivery date.
Note – many a problem arises when successfully quoting to incomplete or loose specifications.
A fundamental step is to establish to know your base position; the price at which you would walk away from the job because it does not meet your minimum profit requirements. We called that “Minacc” – the minimum acceptable price. Minacc should not be guessed. You need a process such as the following:
1. Break the job down into its key components or logical steps. When undertaking projects, this is known as the Work Breakdown Structure (WBS).
2. Determine how you will undertake each of these components - how much will be undertaken by your labour, what equipment is required, and what materials, parts, products or sub-contract are required.
3. Cost or seek quotes for the hire of equipment (if needed), and the materials, parts, products or sub-contract.
4. Determine how long each task requiring labour will take and multiply by the quantities required. In part, this will depend on the equipment necessary, be it a backhoe or a lathe. If more than one product or deliverable is needed, be sure to separate the one-off set-up (non-recurring) costs from the recurring costs.
5. Determine the charge out rate to be applied to your labour, and if appropriate, to your equipment.
6. Identify any add-on costs that may be required; for example, travel and accommodation.
7. Analyse the risks associated with the job. What is the likelihood of some occurrence arising which will add to your costs, for example, unexpected rock in an excavation job? Or risk may arise from incomplete specifications which leave you to guess what the real requirement is.
There is always some risk in a job. What you need to do is determine the likelihood and consequences, and how you are going to cover that risk.
Be quite clear on this. A risk factor is not fat. It is a cost you know will occur but cannot accurately identify. Our Board required a minimum “contingency” of 5% to cover the “unknowns”. Of course, you can't identify it in your tender response. In one major quotation, the unknowns were so great I had a contingency of 20%. That made an interesting challenge.
8. Assemble all the costs.
9. Determine your Minacc - with the minimum Profit you wish to make - and then stand back and review. Where possible check your price against actual performance for other similar jobs. Get someone else to check your quote for any errors.
10. Now you have to determine the bid price.
- What do you think the market will bear?
- What is the competition like?
- Have you any distinct points of difference which adds to your value?
- Can you demonstrate performance on other contracts of a ‘similar nature, scope and size’?
- Can you back this experience with impressive testimonials?
This is important. Now you are looking to move the value in your Tender beyond price alone, while improving your chances of success.
Do you use a template for costing and pricing? There are advantages in doing so. A template will considerably reduce the time taken to prepare your pricing. Built-in formulae will ensure you do not make errors of calculation. It will also act as a checklist to make sure you haven't overlooked anything and provide a record for when you win the job.
I’m continually surprised by how many businesses do not have a formal process for preparing a tender, including a pricing template. Prices worked out on random spreadsheets and laboriously translated into a tender response may not be consistent.
Some of the mistakes people make in preparing their price?
Failing to incorporate some direct costs - Failure to incorporate costs that are directly attributable to a job or project can lead to loss of profits. Examples I have seen include:
- A market research assignment may require a lot of telephone work. Telephone costs are normally considered part of overheads, but if they are incurred disproportionately against a project, then allowance should be made in the pricing.
- Freight either associated with incoming products and materials or for delivery is often buried in overheads. However, it is usually a Variable Cost directly related to Cost of Sales.
- Replacement tools - many small hand tools are worn out during the year, with the rate of usage directly related to the amount of work being done. They are thus a Variable Cost.
- Consumables should be treated similarly.
- If such costs are not attributed to the Cost of Sales either directly or through the calculation of your charge-out rate, they become an overhead or not included in the sale price.
Confusing owner’s salary and Profit - As a business owner or manager you need to distinguish between the salary the business pays for your skill and experience, and the Profit the business returns you for the risk of investing in the business.
Your salary is not Profit. It is a cost of doing business. The Profit your business should earn, after allowing for all wages, should be at least equal to what you could earn by investing your capital in a low-risk investment such as government bonds.
The dangers of discounting - Unless your cost of sales goes down at the same rate as the sales price is lowered, the loss in margin comes straight off your nett profit line.
Look before you cut prices to win a job! Because the cuts come straight off the bottom line, you have to sell more just to maintain the same level of profits.
And the next time you bid the buyer will expect a similar price. With one client, I found that a major client of theirs was getting their work at a charge-out rate below cost purely because of this factor.
It is important to move your quotation beyond price, to have your potential customer consider factors other than price in making their decision.
From a marketing viewpoint, the difficulty with simple quotations is that the information requested is often limited to price and delivery. Tenders are much more complex.
The problem that placing all emphasis on price is that this leaves the Buyer with only one thing on which they can make a decision – the price. And which way will they be looking for the price to go? DOWN!
So spend a little more time on preparing your next Tender, proposal or quotation.
Good luck only happens to those that get in front of it.