Budget Pricing - A Plea to Vendors

Gents

This is an unsolicited notice to any vendors or suppliers who may be group members.

The topic is budget prices.

When you are requested to provide a budget price, the purpose of the request is to obtain an indication of the likely final cost of whatever is is that you supply or do. It is not to provide a price which, if high, will eliminate you from a shortlist. The eliminations come at the quotation (RFQ) stage.

Before a project is approved, it is necessary to provide the boss, board or whoever with a preliminary cost/benefit report for the proposed project. If there is no benefit from spending the money, then there is no point in doing the project. The budget price is used to prepare the cost element of the report. The boss submits the report to his boss or whoever, with a view to having the expenditure approved.
If approval is obtained, the project is detail designed and a detailed cost estimate is prepared, based largely on quotations. If the detailed cost estimate equals or is less than the preliminary estimate then the project will proceed. If not then the project stands a good chance of dying regardless of the new cost/benefit. The reason is political: if our boss goes to his boss asking for more money it can be seen as a sign of weakness. If our boss goes to his boss and says he has cancelled the project due to likely cost overruns, it looks like strength.

The estimate increase, when it happens, is often due to to large increases from budget to quoted price from Vendors. The normal vendor excuse is lack of a definitive specification. Equally likely is that on further discussion, it becomes apparent that the vendor had a very good idea what the higher final price would be, but was afraid to use the higher price, at budget stage, in case his competitors got the advantage.
The solution is simple:
Vendors, give two prices; one based on what was asked for and one based on your interpretation of the likely cost of the anticipated final spec. Your explanation of the difference is invaluable. The difference can be easily estimated by comparing previous preliminary estimates with final prices from your files.

You may find that this approach gives you a useful advantage over your competitors, without extra cost or exposure.

Cheers

Steve McKenzie Received on Mon Nov 04 05:08:00 2002