Working with numerous prospects and clients over the years, we often find it helpful to clarify the difference between estimating the cost of performing the work scope in an RFP and pricing that cost estimate.
Cost estimating and pricing are two sides of the same coin. You need the foundation of a data driven cost estimate to execute the RFP scope of work so you have a credible basis to determine your pricing strategy to win the contract. Without a sound cost estimate for the work scope, the pricing strategy gets lost because it isn’t built on a realistic assessment to perform the work.
Cost estimating is the process of developing the approximate cost of completing a defined scope of work, a quantitative result the proposal team cost estimating professionals can substantiate. Creating a realistic cost estimate and documenting the basis of estimate rationale is often the more difficult part of preparing a proposal response – getting this right makes it easier to determine your best pricing strategy.
A credible project cost estimate requires:
Pricing is the process of determining the amount of money your company will charge the customer to deliver the product or services as specified in the RFP. There are a number of factors the business development team considers such as sales volume, how you intend to deliver the product or service, competitors, value of the product to the customer, and market place positioning.
Once the business development team is able to assess the cost estimate (the output from the proposal team’s development process), they can analyze different factors to determine their pricing strategy to meet their business objectives. Examples of common factors include:
The proposal and business development team work through the iterative process of making adjustments to the base cost estimate data, rationale, and assumptions to arrive at the final cost estimate for submission to the customer. With a data driven cost estimate, it is easier for the business development team to assess their options using facts and figures. They have a credible basis to estimate the likely profit margin and are aware of potential risks, that if realized, could negatively impact the company’s bottom line. Based on the confidence level for winning the work and when the contract is likely to be awarded, corporate can also use the cost estimate data to manage key resource demand and availability.
This is where basis of estimate software such as ProjStream’s BOEMax can make a difference because it is an integrated cost estimating and pricing tool. It functions as “command central” for the proposal and business development team because the complete set of data for the cost estimate resides in a single database – including the narrative information.
With BOEMax, the cost estimators can quickly build out their data using the framework of the work breakdown structure, search previous cost estimates or historical actual cost data for use in their proposal, use established process standards as the basis for common tasks, create hierarchical project BOMs and document supplier BOEs. They can share schedule activity data bi-directionally with Oracle Primavera P6 or Microsoft Project to define their work packages, resource requirements, and create the time phased cost estimate data in BOEMax. The project’s rate structure automatically calculates labor direct costs and overhead costs. As they are developing their cost estimates, they can enter their basis of estimate narrative text or supporting data to describe how they arrived at their numbers.
Working with the business development team, the proposal team can use the global update functions to switch out resources, increase or decrease labor hours for a select set of tasks or resources, or make other adjustments to fine tune the source data. Should the sequence of work change, the proposal team can quickly make that adjustment using the bi-directional schedule integration to modify work package time frames, durations, resource requirements, and time phasing in BOEMax. The business development team can create multiple versions to compare their different pricing scenarios to determine their best options.
Because everything is in a single database, all outputs are fully traceable from the top down or bottom up. The proposal team can produce the final cost summary report for the cost volume submission to the customer with full confidence they have the complete set of data including basis of estimate narrative information so the customer can verify how they arrived at their numbers.
Don’t settle for bidding tools that just focus on pricing the cost estimate data. You are missing the most valuable piece of the puzzle to make fact-based pricing decisions – how did the proposal team arrive at their cost estimate numbers? If you can’t figure out the basis for the estimate, how do you know if you are making the right decisions on the pricing side? You do have options – schedule a demo of BOEMax today!
Updated September 25, 2020