Chapter 14 Pricing and Estimating

Pricing and Estimating Many managers regard pricing as an art ! Many managers regard pricing as an art ! Information available to one bidder is generally available to others. This is an essential part of the planning process. This is an essential part of the planning process. Forms the basis for establishing standards for budgets, man-hours, material costs, contingencies, etc. Forms the basis for establishing standards for budgets, man-hours, material costs, contingencies, etc. Specific pricing strategies must be developed for each situation. Specific pricing strategies must be developed for each situation.

Two Types Of Acquisition Policies for Pricing Type I acquisition: One-of-a-kind contract with little or no follow-on potential Objective: - Win the contract - Execute it profitably PRICE IT BASED ON MARKET FORCES PRICE IT BASED ON MARKET FORCES Type II Acquisition: One of many contracts One of many contracts An entry point to larger follow-up project contracts An entry point to larger follow-up project contractsObjective: - Win the contract - Perform with excellence PRICE IT BASED ON ACTUAL COST OF OPERATIONS

What to estimate? Work Work Capacity Capacity Site (roads, paving, landscape, etc.) Site (roads, paving, landscape, etc.) Labor wages, productivity, etc. Labor wages, productivity, etc. Schedule Schedule Materials, equipment, etc. Materials, equipment, etc.

TYPES OF ESTIMATES Order of magnitude estimates Order of magnitude estimates - Made without any detailed engineering data - May use past experience - Accuracy +- 35% within the scope of the project Approximate (rule of thumb) estimates Approximate (rule of thumb) estimates - Made without any detailed engineering data - May use previous similar projects -- - Accuracy +- 15% Definitive (or detailed) estimates Definitive (or detailed) estimates - Prepared from well-defined engineering data, vendor quotes, unit prices, etc. Accuracy +- 5% quotes, unit prices, etc. Accuracy +- 5% Estimating manual Estimating manual - Developed over time - Use to price out “effort”. Accuracy +-10%

Cost Foundations Actual costs to date and estimates to completion Actual costs to date and estimates to completion Proposal data Proposal data Marketing intelligence Marketing intelligence Past performance and trends Past performance and trends

Pricing Method Work is priced out at the department average, and all work performed is charged to the project at the department average salary, regardless of who accomplished the work. Work is priced out at the department average, and all work performed is charged to the project at the department average salary, regardless of who accomplished the work.

Pricing Method (Continued) Work is priced out at the department average, but all work performed is billed back to the project at the actual salary of those employees who perform the work. Work is priced out at the department average, but all work performed is billed back to the project at the actual salary of those employees who perform the work.

Pricing Method Continued) The work is priced out at the salary of those employees who will perform the work, and the cost is billed back the same way. The work is priced out at the salary of those employees who will perform the work, and the cost is billed back the same way.

Pricing out the work--Steps Clear and complete definition of work Clear and complete definition of work Develop a WBS Develop a WBS Price out the WBS Price out the WBS Review WBS cost with each functional manager Review WBS cost with each functional manager Review the Base case costs with upper level managers Review the Base case costs with upper level managers Negotiate with functional managers for qualified personnel Negotiate with functional managers for qualified personnel Develop Linear Responsibility Chart Develop Linear Responsibility Chart Develop the final PERT schedules Develop the final PERT schedules Establish pricing cost summary reports Establish pricing cost summary reports

Smoothing out Resource Loadings

Life-Cycle Costing (LCC) “Total cost to the organization for the ownership and acquisition of the product over its full life” “Total cost to the organization for the ownership and acquisition of the product over its full life” – Cost of R&D –Cost of production –Cost of operation –Cost of support –Cost of disposal Evaluate R&D cost against LCC

Life Cycle Costing SYSTEM R&D PRODUCTION SYSTEM ACQUISITION OPERATION AND SUPPORT LIFE CYCLE COST YEARS

Estimating Pitfalls Misinterpretation of the statement of work Misinterpretation of the statement of work Omissions or improperly defined scope Omissions or improperly defined scope Poorly defined or overly optimistic schedule Poorly defined or overly optimistic schedule Inaccurate work breakdown structure Inaccurate work breakdown structure Applying improper skill levels to tasks Applying improper skill levels to tasks Failure to account for risks Failure to account for risks Failure to understand or account for cost escalation and inflation Failure to understand or account for cost escalation and inflation