Lesson 13: Pricing

You wouldn’t believe how many times as a tender writer I get asked, “How do you work out a tender price?” Actually, you probably would believe how often I’m asked this question. And honestly? There’s no straight answer because every tender is different. Only you know your business, your operating costs and who your competitors are. No one is in a better position than you to understand your market and your cost model.  

Furthermore, a tender for the supply of Band-Aids will have a different pricing structure to one catering for a government function or cleaning an office building. As you can imagine, providing individual pricing techniques is pretty difficult.  

Pricing Model 

There are three elements to a price: 

  • Direct costs are the specific costs incurred to provide the product or service e.g. staff, materials/sub-contractors and supervision. 
  • Indirect costs include premises, management, professional fees, administration etc. 
  • Profit is the difference between the selling price and (1) & (2).  

When pricing your tender, there are four different models you can use: 

  • Cost-plus pricing is a very common pricing methodology. You take into account all costs and then add your margin (e.g. percentage mark-up) to get to the selling price. You can then see how your prices compare with the market when making an acceptable profit. It’s a good starting point for pricing tenders. 
  • Value-based pricing means selling at a price that customers are willing to pay. It may be higher than cost-plus, especially if you offer something that is premium, scarce or needed urgently. Value-based pricing can be used in a tender to identify areas where you can charge more. e.g. when you know the value to the customer is more than cost-plus. 
  • Marginal pricing looks at the differences in production levels. This a complex subject with many factors. A typical example is setting the price to cover the extra cost of producing an extra unit of output, plus a profit margin. You may consider marginal pricing when looking at spare capacity within your fixed overhead structure. 
  • Economies of scale are the cost benefits resulting from higher outputs or increased scale of operation. A high-value 3-year contract may enable you to offer a reduced unit price. 

Hourly Rates 

When including pricing for labour, most clients like to see an estimated number of hours and an hourly rate. In professional service industries when quoting on a specific project, some consultants will charge more per hour and complete a task in a short amount of time, while others will take longer but charge less per hour. Make sure you justify your pricing in your cost schedule.  

Fixed Price 

A tender almost always requires you to submit a quotation, not an estimate. That is a fixed, non-negotiable price offer that can’t be changed once accepted. There are some types of tenders that allow for negotiation, but this is uncommon. It’s also very rare to be given a chance to alter your tendered price.  

This means you must be very careful to properly cost for the stated requirements in the tender. If you discover an error once you’ve been awarded the contract, you can’t normally come back with a revised price.  

If a fixed price is required for the life of the contract, it’s important you take into account variables such as Consumer Price Index (CPI) increases or changes in legislation that will affect wages or increases in raw material costs. If there are any additional expenses, for example travel time, it’s important to note these costs. 

Tender Tip

If you are required to enter a fixed price, it’s a good idea to include that if there are any changes to legislation or enterprise bargaining agreements, then your prices are subject to change in line with your industry pricing principals.  

A proposed payment plan for a fixed-price offer is also important. You should outline your proposal for progress payments, milestones and the percentage of the contract price to be made as a final payment.  

Discounts and Rebates 

A discount for early payment is worth considering as an inclusion in your pricing plan. Discounts can be offered if payment for products and services are made within ‘X amount of days’, dependent on the volume of products or the size of the project. When comparing tender responses, the client will take any discounts offered into consideration. 

Discounts or rebates can be on the following: 

  • Early payment terms   
  • If the contract exceeds a value 
  • If the contract term is extended 

Remember: rebates and discounts add value to your client and provide them with savings, which is always favourable!  

Tender Tip

If your discount or rebate provides the client savings, don’t be afraid to spell it out. 

Dawtek offers a 5% discount for early payment over the life of the contract. This offers you a saving of $25,000 over the contract term. 

Other Pricing Factors  

If only a vague brief was provided, you can include an estimated price range but also be sure to include a disclaimer stating that prices may vary and a complete brief will be needed in order to provide an accurate costing. If you are in a volatile market where prices fluctuate rapidly, put an expiry date on your proposal e.g. ‘prices valid until 31/05/2018’. 

It’s important you specify payment terms very clearly including billing cycles, credit terms, due-by dates, payment methods, default charges, deposit requirements and more.  

Remember that not all tender pricing schedules or specifications make sense in the real world. This can be due to the client not fully understanding your business or simply an error. It’s always best to seek clarification on any questions regarding costs so you can provide the client with the most competitive price.  

However, be very be careful of making qualifications i.e. “this price depends on …” Many tenders specifically state the tender must be submitted without qualification. If you think you need to make qualifications, ask for clarification, or walk away from the tender. This is part of your Tender Bid or No Bid strategy.  

Pricing explanations help make it easier for the evaluation team to understand how you priced your tender – they are not for qualifications. 

Alternative Bids 

Some tenders invite you to submit an alternative bid. Where possible (if the tender allows), offer an alternative. They tend to be well-received and score higher marks. Your alternative bid does not necessarily need to be a fully-costed alternative, but rather a platform for you to highlight potential savings within your quality response. You can then confirm with the client within the tender pricing schedule as a summary or note. For example, the tender may specify using Brand ABC, but you know you can make significant savings by using Brand XYZ.  

For the sake of co-operation, always give the customer what they ask for. Additionally, you can then offer the alternative and why it’s a better and greater cost-saving solution.