Pricing & costing?

Dear Ritesh,

You question is very good point.

The price of something is the amount of money we exchange for the good or service. The cost, however, includes more than the price – it includes the opportunity cost.

clive ,you are quite right insofar that we subbies get our margins hammered every month we submit a claim for payment

Take housebuiding here in Scotland , I have submitted various costed tenders which are to fixed for the duration of the build . These tenders are compiled using Laxtons or Spons priced schedules and still we have to negotiate on what should be a clear accepted market price for the job.



We have to make the difference up on daywork rates.

You have a strange way of looking at things Anoon, however I think I understand.

At the most basic level, cost has no profit in it. However at each level removed from the raw materials and manufacture, a level of profit is added in however, until the main contractor’s ’cost’ will include his sub-contractors profit, the sub-sub contractors profit, the plant manufacturers profit, the plant hirers profit, the materials manufacturers profit, the builders merchants profit, etc etc.



If gambling is the assessment of and taking of calculated risks, then so is business.



And so is life itself - carry on gambling, or don’t get out of bed in the morning

whatever you name it! it’s still business, and your aim is to make profits!



i believe that business is gambling, and those who make good profits are good gamblers! (and for sure are good Planners!)



so whether its costing or pricing, there is profit! whoever said there is none is a lawyer!

"The difference is, where did you hide the profit? in Pricing? or in Costing?"



What profit? Who profit? Where profit?



Costing and pricing are only tangentially related. The cost is the cost; you can charge however little you want, and frequently value drivers other than direct product revenues may cause a "loss leader". The most familiar of these is probably HP inkjet printers, where the loss is made up by revenue from ink cartridges.



A list of some possible value drivers is here:



http://www.totalprojectcontrol.com/resources/pvd/pvd.html



What is key is that, during project performance, the precise value drivers and their value not be forgotten! For example, if we choose to bid low on a given project because it will give our staff the opportunity to work with a new technology that has future value, let’s not forget later, and decide to use the old technology to keep costs down!





"Once the contract is won, then it is necessary to make sure that you perform as per the budget. This is the costing process - to find out how much it costs."



This may be how it is often done. However, to submit a fixed price bid without a pretty good idea of cost is often a quick route to bankruptcy.

Of course, both can have monetary units. But costing can and is generally done in terms of resource units.



But costing should not be confused with accounting which is different thing again. Profit (or loss) comes in accounting.



Costing is a project control function (but of course it can be extended to collect historic data). Costing information will provide you earned value (either as units or as money units) which you can use to compare against baseline (budget) units to give you the health of the project.

You cannot hide any profit in costs, so the answer must be in the Price.



There should be no suggestion of hiding it though, we are all working to make a profit, and the thought that contractors hide their profits is a typically British one.



We should be upfront about the fact that we include profit in our prices, and clients should be happy to pay for it - our clients are, generally, organisations which make profits and understand that we need to as well.

I believe that both (Pricing & Costing) use the same unit, may it be in dollars, pounds, dinars etc.



The difference is, where did you hide the profit? in Pricing? or in Costing?

To fine tune what was said before - ESTIMATE is the basis of pricing and initial budget. Among various ways of estimating, "guestimate" may be the prevailing one but usually there is always some reasons why such a guess was made.



Pricing is market influenced decision process. As I said before the estimate gives basic guideline in making this decision. Once the contract is won, then it is necessary to make sure that you perform as per the budget. This is the costing process - to find out how much it costs.



Usually costing for project control but in many comapnies, it also provides historic database for future estimates to be made.

Agree.

To my understanding.

Costing gives you budget.

Pricing gives you the selling price.

I’m just going to agree with everybody ’coz I can’t [] argue today.



James.

Here, here Trevor. Beautifully scripted.



James.

Richard,

if you propose a price at the early tender stage without assessing the cost of performing the project, how do you know that the cost will be less than the price, ie that the project is even feasible?

Also, what is the basis of the price, other than some number plucked out of the air?



I know that it is very common for construction companies to bid a price which is based only on trying to guess the other bidders prices and bidding lower. It is also very common for construction companies to win a job based on a low price and then discover that they are shackled to a nightmare which loses money and maybe sends them broke.



This is gambling, not planning.



Suppose instead that when asked to tender to build a house, the builder does some very detailed planning and determines that he can build the house for a cost of $1M AUD (v typical). He then can say that he wants to make say 20% profit and bid $1.2M.



If the client insists that it must be done for $0.9M, for no real reason at all, the builder can let him choose some idiot who will promise anything in order to get the job.



Why not take the $0.5M bid and send everyone broke in the process of building a house which turns out to be a pile of junk because everyone realises they are losing money and try to cut corners.



The reason that detailed planning and costing is not done early is because they think that it takes too long or too much effort, certainly a lot less than just having a guess. It doesn’t though if they know how to do the detailed planning early and properly and quickly. But they don’t, so they have to guess.



This would be OK if the choices that idiots make only had bad consequences for them, but the problem is that it hurts everyone involved, ie any suckers that they can persuade to be involved, sub-contractors and employees mainly. So it is irresponsible to endanger the livelihoods of other people who have families.

Mr.Pranab..



You are correct..i tried to explain in the simple trminology..u threw light on the exact terms.I really appreciate your effort in delivering exact terms.



VENKAT

Dear Mr Venkat ,

Its the same as Cost price(CP) and selling price(SP) , for construction.

CP= Materials cost + Manpower + Equipment +Transport + any other costs

SP = Materials cost + Manpower + Equipment +Transport + any other costs + Overheads ( site , branch head offices )+ expected profit/margin

this is my understanding

regards

deb

From my understanding and knowledge/experience the answer is as below..



Pricing is related to the product to be sold out after manufacturing process is carried out,and costing is related to the process carried out for manufacturing the product.



The terms would sound with similar sense but have a vast difference.For instance..The price of a Parker pen would be Rs.150/- but if you proceed on calculating the costing of the same pen it would be much less than Rs.150/-.The costing involves various taxes and cost of manufacturing like-manpower,machines,electricity,raw material and etc.But pricing is the final one.



Regards,



VENKAT