Set a price you can deliver at

A competitive price is useful only if the promised service can be delivered at that price. This lesson uses simple management calculations to connect your technical offer to its cost. The figures are fictional and exclude taxes unless stated otherwise.

Common to all countries

Build costs from the proposed work

Start with quantities and resources: hours by role, visits, travel, equipment, materials, specialist services and mobilisation. Include the overheads you allocate to the contract and explicit allowances for identified uncertainty. Avoid counting the same expense twice under different headings.

Record the assumptions behind each line. “Ten visits” is incomplete unless you know what a visit includes, how long it takes and who pays for travel or parts. Test the cost of every technical commitment, including reporting and contract management.

The Scottish Government’s price-evaluation guidance explains, in its buyer context, that evaluation may consider cost components and costing models beyond a simple headline-price comparison. Your first task is to understand the actual pricing schedule and evaluation method in this tender.

Worked example: margin is not markup

Assume Luma estimates direct delivery costs of 10,000, allocated overheads of 1,000 and a risk allowance of 1,000. Its simplified cost base is therefore 12,000. These categories are internal planning assumptions, not prescribed tender line items.

Luma wants a margin equal to 20% of the selling price, after this cost base. Let price be P. Then P − 12,000 = 0.20 × P, so 0.80 × P = 12,000 and P = 15,000. The resulting 3,000 is 20% of sales and 25% of costs.

• Direct costs10,000
• Overheads1,000
• Risk allowance1,000
• Planned result3,000

12,000 costs + 3,000 result = 15,000 sales. 3,000 ÷ 15,000 = 20%.

Simply multiplying 12,000 by 1.20 produces 14,400. That adds a 20% markup on cost, but the resulting 2,400 is only about 16.7% of the 14,400 selling price. Always name the denominator when your team discusses percentages.

This is a planning calculation, not a prediction of accounting profit: actual costs, tax treatment and the use of the risk allowance may change the result. The commercial decision about the target margin remains yours.

Translate the model into the buyer’s schedule

Check units, quantities, currency, rounding, optional items and the treatment of taxes. If the buyer asks for a price per visit, do not silently substitute a monthly fee. Keep your internal model detailed while completing the official schedule in the required format.

Reconcile totals and make sure the technical and financial submissions describe the same scope. If assumptions or qualifications are restricted, do not insert your own exclusions without checking their admissibility. Use the prescribed clarification route for ambiguous instructions.

Test volume and cash timing

A lower volume of orders may leave fixed costs spread across fewer visits. Model a lower-volume case, especially where a framework estimate is not a guaranteed minimum. Also consider input-cost changes over the contract term and whether the actual contract allows price adjustment.

Profit does not mean cash arrives before expenses. Put payroll, supplier payments, mobilisation costs and expected customer receipts on a dated cash plan. A profitable service can still need working capital when wages and materials are paid before an invoice is accepted and paid.

Country specific — what to verify

Check taxes, labour-related obligations, currency rules, invoice requirements, payment provisions, securities and permitted price-adjustment mechanisms. Verify how the procurement handles unusually low offers and any requested cost justification. Do not assume the cheapest compliant bid automatically wins or that prices can be renegotiated after award.

Put it into practice

Rebuild the example with a 15% target margin on sales. Then test what happens if the cost base rises by 10% while the selling price remains fixed at 15,000.

Self-check: 12,000 ÷ 0.85 is about 14,117.65 for the 15% target. With costs rising to 13,200 and the price held at 15,000, the simplified result is 1,800, or 12% of sales. Record which cost assumptions deserve the closest monitoring before approving the bid.