Cost and Pricing Data
Cost and pricing data are developed based on past performance and customers’ perceptions of value. In some settings, they must be disclosed to customers in precise detail.
Cost and pricing are highly dependent on the setting. Indeed, among all parts of the business development lifecycle, approaches to cost and pricing may be the topic that differs most between government and commercial settings. This is because bid for government agencies and pseudo-government entities often have strict regulations regarding cost and pricing data.
Many government regulations require organizations to submit or disclose certified cost or pricing data that are reasonably available when the price is agreed upon. If the organization is required to submit cost or pricing data, it is also required to obtain certified cost or pricing data from subcontractors and prospective subcontractors.
Before you consider bidding for a government procurement, be sure you understand acquisition rules and regulations. (See the end of this section for more about cost and pricing data specific to various government settings.)
An understanding of cost and pricing is important for bidders in all environments. Showing what your price comprises demonstrates your logical approach and gives credibility to your proposal. Further explanation of what constitutes the value you bring over your competition goes beyond “just the numbers” in making your bid convincing. It is an important part of developing a winning price. In a commercial setting, you prove you have a logical approach to your pricing when you provide some details of what your price represents in both true numbers and graphic form.
1. Distinguish between price, value, and added value.
To arrive at a winning price, you must understand the distinction between price and value. Price is what you charge a customer for a product or service. Value is what your customer perceives your product or service is worth. The following is usually true of winning prices:
Customer’s perceived value ≥ customer’s budget ≥ your price ≥ your cost
Added value is defined as the difference between the customer’s perceived value of a solution and the price they pay, plus any implementation costs. Customers often choose solutions that offer the greatest added value, or the largest difference between their perceived value and a bidder’s price. Wherever possible in a proposal, explain how your solution adds value.
Saying that you add value and not supporting that declaration with a quantifiable cost/benefit measure, however, makes your claim empty. Your meetings with the customer should uncover the items the customer values so you can address them, explain the benefits your solution brings to the customer, and lay claim to the monetary benefit of your added value.
How you quantify the added value depends upon what the price would be without the benefits you bring. A good way to display this is to show how much more effective your solution is in real dollars than it would be if you did not provide that benefit. Your goal: Convey to the customer that without you as their choice, they might waste time, money, or their own implementation efforts.
2. Present cost and pricing data in a summary form.
The price proposal is an excellent place to include a summary geared directly to the price proposed and the benefits to the customer. Presenting a cost section executive summary is essential to gaining credibility and making your value proposition a complete circle with the technical proposal.
A summary version of cost detail makes the evaluator’s job easier. It also gives the cost analyst and, ultimately, the evaluator a simple and quick view of the costs and price in a constructive manner. Consider the cost summary the message you want the price analyst to deliver to the ultimate decisionmaker. In an executive summary, you get to shape that message in the most positive light.
In your summary, make sure you reach as many of these objectives as possible:
- Total costs or prices in graphics and narrative (many customers want to see the bottom line up front)
- Price of key assumptions (not every cost assumption, but the major, important ones)
- Overall themes
- Price discriminators
- Cost or price implications of choosing your approach
- Your positive approach to the logic and reasonableness of your costs and prices
- Cost tracking and control systems
- The story of your basis of your estimates
The cost proposal summary should tie together details readers will see in the cost proposal. It should also include your estimating guidelines, which will likely need to be tailored from previous programs. Reviewers like to see traceable details as well as summaries of data. An easy-to-review cost proposal gives evaluators a reason to award to you.
3. Use graphics to clearly convey value.
Use graphics, tables, and charts to quickly give the reader a snapshot of the message you are delivering. Graphics can include dimensional pictures of the overall value proposition and price discriminators. It is easy to turn tables of numbers into pie, bar, and line charts that clarify the value of your price. A features and benefits table can quickly highlight the advantages of choosing your organization based on the value you offer.
For both the customer and your own senior management, you can use graphics to gain swift understanding and faster acceptance of the cost and pricing data you present. Some suggested methods to present cost and pricing data are shown below.
|Type of cost or pricing data||Presentation methods|
|Significant cost items or elements||Pie or bar chart|
|Profitability, return on investment, or project revenue (time phased)||Line chart (time phased)|
|Major suppliers or subcontractors||Location (map) plus pie chart (participation percentage)|
|Added value||Bar chart|
|High-risk costs||Side-by-side charts comparing high-risk cost items and mitigation approach impact|
|Corporate investments in the project||Stacked pyramid graph|
4. Quantify all claims with measurable data.
While value may be subjective, cost relies upon facts rather than judgment. To substantiate your cost or pricing data, you must present facts. Your facts not only validate what you are claiming and lend credibility to your organization, they provide you and the customer with the specifics necessary to make an informed decision about your price. Even though price is market driven, the facts help you build a story that builds confidence in your solution.
Justify and build your case for your costs with your past performance historical information. There is nothing more compelling than data showing how you have performed the work before. You may have done the same work before; in this case, you can fully substantiate your price with supporting data. Or you may have completed some parts of the whole; you can call on that data to justify those segments.
Seek other organizations’ historical data where you are lacking information and use that data to generate your gaps. Better yet, call on your subcontractors or vendors to fill in the gaps where they have historical knowledge and data to support the project.
Accurate and complete cost data are best estimated using a bottom-up basis of estimates. Bottom-up pricing is simply rolling up time and material costs, plus appropriate overhead. It contrasts with top-down pricing, which begins with the customer’s budget and perception of value, working down to a suitable price.
In evaluating data presented, cost analysts rank estimated rationale in the following order, from most to least reliable:
- Firm, negotiated vendor prices
- Past-performance historical prices paid
- Quotes from vendors/suppliers
- Engineering judgment
- Cost and pricing data must be based on facts rather than judgment.
- To add value, you must know what your customer considers valuable. Use customer intelligence to shape your proposal pricing.
- A quick and easy way to convey value is by using graphics. Choose the right graphic for the data you need to display.
- The cost executive summary is crucial to gaining credibility with the evaluator and making your value proposition sell.