The best advice that we can give to you is to be as competitive on your pricing as possible. There are too many ways to price a product or service. I am not going to provide you with a ton of insight into this, but I will provide sound guidance. I can tell you that the old stories of the government buying toilet seats for $200 and $300 hammers are simply that – old news. In today’s age, you had best sharpen your pencils and be as competitive as possible. Next, we will be discussing common pricing factors to consider.
Common Pricing Factors
Make sure when pricing your product or service that you cover all your costs and protect your profit. Here are things to consider when determining your price:
- Pricing History – For pricing information on previous products, you may be able to obtain pricing from Block 10 of FS Form 33. That is if that form was used. If not, contact your local PTAC and ask them to research for you. They will be able to provide you with a report for an item. Now on a service, that is a lot more difficult. You will have to get ahold of the contract number and request the contract, along with the statement of work. Obtaining copies of this information can be accomplished through the Freedom of Information Act. (FOIA). You may also be able to achieve this research yourself by using USASpending or Federal Procurement Data System (FPDS).
Cost Out All Special Requirements The buyer may ask for many costly extras. Look for packaging requirements. These can be expensive. Don’t just stick on a percentage of the cost of the item to cover packaging.
Quality Requirements – Will any of the certifications and acknowledgments add on extra costs? Spend some time thinking about this.
Factor in Bidding Costs – some offers are rather simple and straightforward, but as the value of the contract increases, more time and labor are usually required. As a rule of thumb, you can estimate that the cost of putting together an offer will run 3% to 4% of the value of the proposed contract. Make sure current finances can handle that cost.
Overhead and Profit – Make sure your profit is reasonable. Remember that the bidding process is very competitive. You are free to figure in as high a profit as you wish, but you must win the contract to enjoy it. Never bid if it doesn’t make good business sense. And while making sure that your price covers your overhead costs may seem very basic and obvious, it is the pricing factor that small businesses most often get wrong. This can be detrimental to your business. If your cost information is not correct, you can’t accurately bid a contract, be competitive, or make the right decisions for your company.
Additionally, I am including some helpful formulas to assist you.
To help you, we are including some formulates that might help you figure out what your essential costs and profit might be.
Product Pricing Formula
Material Cost + Labor Costs + Overhead Expenses /# of times produced = Cost per item.
- Figure the total cost of the raw materials used to make up a single item, or
- Divide the material cost of a batch of items, by the number of items produced.
- Figure what you pay to employees to produce the item, whether you have employees.
- Assign a wage figure even if you are the only one producing the item.
- Take the weekly salary you pay someone to produce the weekly volume of items and divide it by the number of items.
- Rent, Gas, Electricity, Business telephone calls, Cleaning, Insurance, Office Supplies, Postage, Repairs, Maintenance, Delivery and Freight Charges, Packaging, and Shipping Supplies.
- If you are working from home, calculate a portion of your total rent or mortgage payment, in proportion to your workspace, or assign a reasonable figure.
- List all overhead expenses items and total them.
- Divide the total overhead figure by the number of items per month. This will be your overhead per product.
- Add an amount to the cost of each item. Check your competition for what they are charging and work accordingly. This establishes your profit margin. Remember that just because this is a “government” contract does not mean you can add excessive profit.
Add Profit to the Cost per Item for the Total Price per Item.
Service Pricing Formula
Hourly Overhead Expense + Hourly Wage + Profit = Total Price per hour.
- Calculate all the costs related to operating your business from home and arrive at a total cost per month.
- Divide this by the average number of hours worked per month, to obtain your hourly expense.
- Hourly Wage. Decide on a wage to pay yourself, considering background training and expertise.
- Compare this to industry averages
- Hourly Profit: Add a factor to your hourly wage to provide a profit.
- Check your competition and market demand.
I find that the simpler you can make your calculation, using all factor above, will help you come up with some real costs.
Determine Your Costs
Why do we say that small businesses tend to get their cost information wrong? Simply because many, if not most, small businesses don’t know what their overhead costs are. Most small business only uses prime costs to compute their pricing. Let’s find out why is not the best way to compute your costs.
Often when pricing your project, businesses will take their prime costs (labor and materials) and mark that figure up by some percentage that they believe is enough to cover all indirect costs and give them some profit. Or they will use a single, company-wide rate applied on only one type of bases, such as direct labor hours or engineering hours, for assigning indirect costs to the product or service provided. In either case, if this estimated percentage is higher than what their overhead is, it affects their ability to be competitive. If their estimate is lower than what their costs are, it affects their ability to be profitable.
If your business falls into one of these categories, we strongly recommend that, before you bid on a contract (or on any other project for that matter), you take the time and the steps necessary to determine your actual costs.
You might consider using some form of activity-based costing (ABC) to accomplish this. ABC, in its simplest terms, is a cost management method that allows a business to determine the actual cost associated with each product or service. With this method yo look at every time and activity in your business associated with putting out your product or service (e.g., heats, lights, administrative help, sending out an invoice, doing payroll, etc.) and then attach a cost to it. In other words, you break your costs down to their least common denominator, so you know what they are.
Without knowing your actual costs, you can never be sure where the money is being made or lost, you can’t identify moneymakers and losers (an increase in sales does not necessarily mean an increase in profit), and you can’t make sound strategic decisions and plans for your company.
Although ABC is geared toward a large business, a small business can adapt this philosophy and utilize a more simplified form of it. For more information on ABC, try searching the Internet or check out some of the books on the topic at your local bookstore or online. Now, I do have a word of caution.
Federal Acquisition Regulation (FAR) Part 15 discusses negotiations and costs for contracts of $100,000 or more and looks at allowable and allocable expenses. If you are going to be submitting proposal over $100,000 either bone up on the FAR in this area or get an accountant who is familiar with government contracting.
Again, I need to remind you to carefully read the solicitation and make notes on points you don’t understand. Then ask the questions. Go to the buyer or Point of Contact identified in the contract, the small business specialist at the buying office, or a Procurement Technical Assistance Center. Please ask someone. Also, the answers could significantly affect your price and your profit.