Cost estimating is easier than you think.
When I was first starting out, cost estimating for my proposals terrified me. I was worried that I was going to high-ball my price, offend my client, and look foolish. Or that I would lowball it, lose my shirt, and look foolish.
I don’t worry so much anymore. Here are some simple methods to do cost estimating for consultants.
Estimating Method one: ask them their budget, and charge them that.
I know this sounds simplistic. But you should always ask your client what their budget is. Do it early on; do it when you first talk to them, or when you send in your bidder questions, or at the bidder’s telephone conference. I guarantee they won’t be offended; I guarantee it won’t make you look unprofessional. Just say, “Are you able to disclose your budget for this project?”
Here’s what they’ll say. Either, “Yes and it’s XX dollars.” or, “We’re not disclosing that as we want to see what kind of value comes in with the bids.” See? Easy. They get asked this all the time, and I’m surprised how often they will actually disclose it. In my experience, it’s about 40% of the time.
And if they do disclose the budget, you should structure your cost estimating to soak up most of it. Not because you’re greedy, but because they’ve already done the work of figuring out the scope of the project, and they’ve already calculated how much work it’s going to be. So structure your methodology in keeping with that scope of work.
Sure, you can come in a bit low. That’s always good. But don’t lowball it drastically just to get the gig. You’ll end up losing money and feeling like a rube.
Estimating Method two: find another consultant with roughly your level of experience.
Charge what they charge for a comparable project.
This sounds simplistic too, but it’s really a way of charging what the market will bear. Remember that competitive analysis you did earlier on? If you can find out what your competitors are charging for comparable work, just charge that. Or charge that plus a premium—up to 50% more if you’re confident you can deliver better value.
Easy.
Estimating Method three: cost out your task list.
Take your task list from your methodology. Add up all the hours it’s going to require from you. Add in at least 10% for contingency.
Now multiply that by the amount you used to make as an employee for comparable work.
Now double it. There’s your fee.
Why double? Overhead, insurance, retirement. All that stuff you never had to cover. Trust me, double it.
The lowest bid doesn’t get the contract.
This is a pervasive myth, and we need to bust it. It’s very rare that a client will have a policy of taking the lowest bid. Why would they? Why would they risk a bad outcome just to save a little cash? They don’t want cash savings for its own sake.
They want the best possible value for their money.
When you submit your bid, they’re going to separate the technical from the financial. They’re probably not going to look at the financial until they have rated all the technical submissions and charted them out in a spreadsheet and ranked them, top to bottom.
They’re going to have a benchmark rating for those technical submissions. Say it’s 80 out of 120. Everybody who scores above 80 on the technical is still in the race. Everybody who scores under 80 is eliminated, without the client ever knowing what their fee was. The fee doesn’t matter; they’re simply deemed “non-responsive.”
OK now, with all the technical bids rated and ranked, they’re going to open up the financial bids. And they’re going to use a formula to identify the value of the overall bid.
The formula can vary. Sometimes it’s as simple as dollars per point. You got 110 points? Great. Now how much are you charging per point? Best value gets the contract.
Often it’s a more complicated formula. Here’s an example of how one of my clients rates their bids.
