Quotation Costing: Pricing a New Job You've Never Made Before

Before you even pick up a calculator, it's essential to understand what quotation costing really entails. At its core, it's the process of analyzing all potential costs associated with producing a specific product or service and then adding a markup to determine the final price. For a job you've never made before, this requires a blend of research, experience, and strategic assumption.

There are three primary cost categories you must consider:

• Direct Costs: These are costs directly tied to the production of the item. They include raw materials, labor hours, and any subcontracting expenses. For a new product, you'll need to research material prices and estimate labor time based on similar jobs or industry standards.
• Indirect Costs (Overheads): These are the costs that aren't directly traceable to a single product but are necessary for your business to operate. Examples include rent, utilities, administrative salaries, and equipment depreciation. A common mistake is to overlook overheads, but they must be allocated to each job to ensure profitability.
• Contingency: This is a buffer for unexpected costs or risks. For a new job, the uncertainty is higher, so your contingency should be larger. A typical contingency might be 5-10% of the total cost, but for a first-time job, you might consider 10-15%.

By clearly identifying these costs, you lay the foundation for a robust quotation. Remember, the goal is not just to cover costs but to generate profit. Your pricing must include a margin that reflects the value you deliver and the risk you take.

Now, let's get practical. Here's a step-by-step framework to guide your estimation for a job you've never made before:

1. Deconstruct the Job: Break the product or service down into its smallest components. If you're making a custom piece of furniture, list every part: wood, screws, glue, finish, and the labor for cutting, assembling, and finishing. This prevents missing hidden costs.
2. Research Material Costs: Use supplier quotes, online marketplaces, and industry reports to get accurate, current prices for materials. Don't rely on outdated data. For new materials, contact suppliers directly and ask for samples or detailed specifications.
3. Estimate Labor Time: This is often the hardest part. If you have no experience with a similar product, use time studies from analogous jobs. For example, if you've made a similar but simpler item, you can estimate the additional time needed for the new complexities. Also, consider the learning curve—your team will be slower on the first run. Add a buffer for this.
4. Factor in Overheads: Calculate your overhead rate. A simple method is to divide total annual overheads by total annual billable hours. This gives you an hourly overhead cost to add to your labor rate.
5. Add Contingency: As mentioned, include a contingency percentage to cover the unknowns. This is not a profit margin; it's a safety net.
6. Calculate Total Cost: Sum up all direct costs (materials + labor) and indirect costs (overheads + contingency). This is your break-even cost.
7. Determine Your Markup: The markup is your profit. It should be based on the value you provide, market conditions, and your desired profit margin. A common approach is to apply a percentage markup to the total cost. For instance, if you want a 20% profit margin, you'd divide the total cost by (1 - 0.20) = 0.80, which gives you a selling price that yields a 20% profit.

This systematic approach ensures you don't miss any cost components and provides a defensible basis for your price.

To improve the accuracy of your quotation costing, you can employ various estimation techniques and digital tools.

Top-Down vs. Bottom-Up Estimation: In a top-down approach, you start with an overall budget or price point and work backwards to see if you can make it work. This is useful when the client has a fixed budget. The bottom-up approach, which we just outlined, is more detailed and accurate but time-consuming. For new jobs, a hybrid approach often works best: use top-down to gauge feasibility and bottom-up for the detailed quote.

Parametric Estimating: This uses historical data and statistical relationships to estimate costs. For example, if you know the cost per square meter for a certain type of construction, you can multiply that by the area of the new project. Even if you haven't made this exact product, you can find industry benchmarks. Industry associations and trade publications often publish cost data.

Three-Point Estimation: This technique uses three scenarios: optimistic, most likely, and pessimistic. For each cost component, estimate these three values and then calculate a weighted average (usually (optimistic + 4*most likely + pessimistic)/6). This gives you a realistic estimate that accounts for uncertainty.

Software Tools: There are many cost estimation software options, from simple spreadsheets to advanced ERP systems. Spreadsheets are a great starting point because they are flexible and allow you to create templates. As you grow, consider specialized software that can integrate with your accounting and project management systems.

Even experienced professionals make mistakes when pricing new jobs. Here are some common pitfalls and how to avoid them:

• Underestimating the Learning Curve: Your team will not be as efficient on the first run. Always add extra labor time for learning. A good rule of thumb is to add 10-20% more time for the first production run.
• Ignoring Overheads: This is a classic mistake. If you only consider direct costs, you'll underprice. Always allocate overheads to each job.
• Setting Contingency Too Low: For new jobs, the unknown is greater. Don't be afraid to set a higher contingency. It's better to overestimate and then, if all goes well, you can offer a discount or bonus to the client.
• Focusing Only on Price: While price is important, clients also value quality, reliability, and service. Don't undervalue your expertise. If you can articulate the value you bring, you can justify a higher price.
• Not Documenting Assumptions: When you present a quote, include a list of assumptions (e.g., material grades, tolerances, lead times). This protects you if the client later requests changes.

By being aware of these pitfalls, you can proactively address them in your estimation process.

Once you have your estimated cost, you need to decide on a pricing strategy. Here are a few approaches:

Cost-Plus Pricing: This is the most straightforward: add a markup to your total cost to achieve your desired profit margin. It's simple and ensures you cover costs, but it doesn't consider what the market will bear. If your costs are high, your price may be uncompetitive.

Value-Based Pricing: This sets your price based on the perceived value to the customer, not just your costs. If your product solves a significant problem or saves the client money, you can charge more. This requires you to understand your client's business and quantify the value you deliver.

Competitor-Based Pricing: This involves pricing your quote in line with what competitors charge. However, this can be dangerous because your costs may be different, and you may end up with slim margins. Use this as a reference, not the sole basis.

Penetration Pricing: For a new job or a new market, you might consider a lower price to win the business and establish a relationship. But be careful—it's hard to raise prices later. If you use this strategy, ensure you have a plan to increase prices on subsequent orders.

The best approach is often a combination. Start with cost-plus to ensure you don't lose money, then adjust based on value and competitive analysis.

Let's illustrate the process with a concrete example. Suppose you run a metal fabrication shop and receive a request for a custom stainless steel bracket. You've never made this exact bracket before, but you've made similar ones.

Step 1: Deconstruct the job. The bracket requires 2 kg of 304 stainless steel, 4 hours of CNC machining, 1 hour of welding, and 0.5 hours of finishing.

Step 2: Research material costs. Current price for 304 stainless steel is $5/kg, so material cost = $10.

Step 3: Estimate labor time. Your CNC machine rate is $80/hour, welding is $60/hour, and finishing is $40/hour. Total labor cost = (4*80) + (1*60) + (0.5*40) = $320 + $60 + $20 = $400.

Step 4: Factor in overheads. Your overhead rate is $20 per labor hour. Total labor hours = 5.5, so overheads = $110.

Step 5: Add contingency. Because it's a new design, you add 15% contingency on the direct costs (material + labor) = 0.15 * ($10 + $400) = $61.50.

Step 6: Total cost. $10 + $400 + $110 + $61.50 = $581.50.

Step 7: Determine markup. You want a 20% profit margin, so you divide total cost by (1 - 0.20) = 0.80. Selling price = $581.50 / 0.80 = $726.88. You round up to $730.

This quote covers your costs, accounts for the unknown, and ensures a healthy profit.

Mastering quotation costing for jobs you've never made before is a valuable skill that can set your business apart. It requires a systematic approach, careful research, and a willingness to make educated assumptions. By breaking down the job, estimating costs thoroughly, adding appropriate contingencies, and choosing a smart pricing strategy, you can quote new work with confidence.

Remember, the goal is not just to win the job but to win it at a price that is fair and profitable. Don't be afraid to walk away if the price doesn't meet your minimum requirements. And always document your assumptions and revisit your estimates after the job to learn and improve for next time.

Now, it's time to put these strategies into action. Start by creating a quotation costing template that you can use for all future estimates. With practice, you'll develop an intuition for pricing new jobs that will help you grow your business sustainably.