Chapter 20: Stating Your Price

Clients normally specify the price information to be included in the bid and the way they want it set out. This may range from tables of fees and expenses to cost schedules and standardized forms and templates. You may be asked to provide bankers' references, balance sheet summaries and other financial data in addition to contract-related price information. As with other categories of information, it is essential to follow meticulously the instructions in the bid specification.

By and large, the information requirements of clients are determined more by their need to be able to identify best value for money and obtain a consistent basis on which to assess the financial merits of individual bids than by the type of contract they intend to apply to the work. Value for money has been emphasized throughout this book as the prime consideration influencing decisions in services and consultancy procurement. Demonstrating the right quality of service is the function of the technical or 'non-financial' parts of the bid: the role of price information is to show that you can offer the right quality at the right price.

Components of Price Information

Whether the bid is for a lump-sum or fixed-price contract, for work remunerated on a time-charge-plus-expenses basis, or for some other type of contract combining fixed and variable cost elements, clients are likely to require a detailed breakdown of costs and an indication of how they were calculated. It is in the bidder's interest to provide a cost breakdown even when this requirement is not specified and particularly when bidding for a public sector contract, if only to demonstrate transparency and to show the factors that condition the price of the work. For some types of contract, bids may need to set out separately the costs of human resources - staff, management, administration and so forth - and physical resources such as IT systems, equipment and materials.

In addition to a statement of the total bid price, bidders may be required to provide information on the following items:

• the estimated costs of each stage or part of the work, perhaps with an indication of the expected weekly, monthly or annual profile of cost accumulation;

• charge rates for the persons undertaking the work;

• a time charge multiplier;

• estimates of reimbursable expenses;

• estimates of subsistence and per diem allowances.

Total bid price

This should be stated in words as well as in figures - eg '45,000 (forty-five thousand) euro' or ' 35,000 (thirty-five thousand pounds sterling)'. Identify the services and activities that are covered by the price - for example, by reference to the scope of work defined in the bid specification.

Make it clear whether the price excludes or includes VAT or whether the services are zero-rated. As a general rule, costs should always be expressed as net of VAT, partly because the net cost represents the true cost to a client organization that is itself registered for VAT, and partly because the tax rate may at any time be increased (or less likely reduced) by government.

In calculating the total bid price, you may wish to apply an across-the-board contingency margin to all categories of costs and expenses, particularly if the proposed duration of the contract is longer than say a year. Bear in mind that a contingency allowance normally reflects an element of risk to cover the cost of unexpected additional work, unforeseen circumstances or cost escalation. Clients are aware that if it is applied overall, particularly in an economic environment where the inflation rate is low, they will be paying it on conventional items of work that are relatively proof against exceptional risk. The most prudent course is to identify those parts of the work to which you would wish a contingency margin to apply, and explain why.

Charge rates

You may be asked to indicate the proposed time inputs and charge rates for the persons involved in the work, calculated on an hourly, daily, weekly or monthly basis. In some contexts it may be appropriate to calculate a specific rate for each individual in a team; in others there may be advantages in grouping members by categories of responsibility or discipline that share a common charge rate.

The client may require these rates to be analysed into their basic ingredients - payroll costs, overheads and profit:

• Payroll costs usually denote the gross regular salary plus bonuses paid to the individual in the office where he or she normally works (or an equivalent target income if the person is self-employed) and the costs of the non-monetary or fringe benefits paid to staff, which normally include employers' statutory insurance contributions; employers' contributions to medical insurance and pension schemes; the costs to the employer of annual leave, sick leave and terminal leave (if taken at the end of an assignment); vouchers for meals or public transport; and other similar items.

• Overheads are the business and premises costs not directly attributable to the assignment and not reimbursable as separate cost items under a contract.

• Profit (or return on chargeable time) is normally calculated as a percentage of the sum of payroll costs and overheads, and geared to reflect the degree of exposure to commercial risk inherent in a contract. As a guide, many contracting firms would hope to achieve average profit margins of between 10 and 15 per cent.

Time-based contracts normally provide for the contractor to be paid up to an agreed price ceiling at rates identified in the contract and calculated on the basis of the periods of time actually spent in performing the work. Clients may require these costs to be presented as a composite estimate or as a set of estimates related to individual parts of the work or to the proposed inputs of individual personnel. If they are working within tight financial limits, they may ask bidders to cost individual parts of a contract as well as providing a total estimated fee, so that they can judge how the available budget might best be allocated.

Time spent on the work is usually interpreted to include, where appropriate:

• time incurred on professional work as defined in the contract;

• time spent on surveys or data processing;

• meetings with the client and with other contractors associated with the work;

• visits to work sites and other relevant locations;

• time spent travelling in connection with the work;

• preparation and production of deliverables;

• presentations of findings;

• follow-up work as agreed with the client.

Some clients have a policy of paying a reduced rate for travelling time incurred during the course of an assignment, for example 50 per cent of the rate payable for time spent on professional work. Other clients may not regard travelling time as chargeable at all. Where teams have to be mobilized and offices set up for contract work overseas or at locations remote from the home base, the time incurred on this activity is normally chargeable as part of the contract.

Time charge multiplier

The relationship of time charges to gross salary costs is sometimes expressed in terms of a time charge multiplier. The multiplier calculation works as follows. Gross salary costs are the basic unit (1.0); three elements are added to this - social costs and overheads, both expressed as a proportion of gross salary costs (say 0.45 and 1.25 respectively), and finally profit, expressed as a proportion (say 10 per cent, or 0.27 in this example) of the gross salary costs + social costs + overheads. The multiplier is the sum of the calculation - in this case 2.97.

The values in the calculation will be different for each contractor and will be conditioned by a number of factors:

• the type of work that characterizes the contract;

• the probable duration of the contract;

• the form of fee payment proposed;

• the way the firm calculates overheads - for instance, in relation to time actually worked or potential workable time, which might include weekends and public holidays;

• the part of the world where the firm's office is based, since this influences salary levels.

Multipliers offer clients a means of gauging the degree of consistency in the pricing structure of the bids received from a contractor. Client sectors such as government departments and agencies may set a maximum acceptable level of multiplier. They may also request information about the average multiplier applied on similar contracts, and may wish to know how the multiplier proposed for the work has been derived - for instance, whether external consultants are included in the numbers of staff considered to be supported by a firm's administration, and if so how this affects the multiplier. Bidders may be required to state whether their overhead figures are audited, and if not to provide evidence of how the figures are determined.

By way of comparison, the Office of Government Commerce has defined a multiplier of two times salary as an alternative basis, if full costs are not available, for quantifying the costs of staff time in calculating the value-for-money benefits to government departments from an improved deal with a supplier (Value for Money Measurement, OGC Business Guidance, November 2000).

Estimates of reimbursable expenses

These are expenses directly and necessarily incurred on a contract and reimbursable either at cost or with a mark-up, management charge or handling fee. Clients will normally require bidders to tabulate individual groups of items separately, and may define budget ceilings for items that are hard to estimate reliably in advance of starting work.

The following are the most common categories of reimbursable expenses:

• travel and transportation: public sector clients normally apply distance-related allowances and cost limits for car travel and specify the use of economy or standard class for air and rail travel; some clients will reimburse air fares only when the relevant passenger tickets and boarding passes accompany the contractor's invoice;

• office expenses related specifically to the terms of the contract;

• equipment, materials or supplies purchased, leased or rented in connection with the contract, including for example the purchase and maintenance of vehicles: where it is expected that equipment purchased for the assignment will be traded in at the termination of the contract, it may be appropriate to include an estimate of depreciation;

• the costs of support services bought in from outside, such as project-related laboratory testing, surveys, field facilities, remote sensing, translation services, legal work etc;

• communications, computing and data transfer, phone, fax and Internet connections and courier services;

• printing and production, including photocopying, scanning and conversion and the presentation of contract-related material in video, CD ROM or other forms;

• documentation, covering the purchase of any necessary documents that may not be supplied by the client;

• on overseas contracts, the costs of local support staff such as administrative managers, secretaries, translators, interpreters, accounts clerks, drivers and messengers, where these are not provided by the client and have to be hired by the contractor.

In certain contexts, such as EC-funded work, clients may stipulate that reimbursables are to be quoted free of taxes.

Subsistence and per diem allowances

When contractors have to work away from their home or office base, the client normally pays an allowance for living and accommodation expenses, calculated as a fixed amount per day for each individual. Clients in the public sector and corporate organizations may impose an upper limit on this amount, reflecting budget constraints or predetermined allowance levels.

On overseas contracts, subsistence allowances are normally paid in local currency and apply only to each day or night actually spent in the territory where the contract is being undertaken. They are generally not payable for periods of leave, save for local public holidays. Financing and development institutions such as the World Bank and United Nations Development Programme as well as EC-funded programmes define standard terms and per diem rates for different countries.