How To Review Price Proposals

The idea of marketing people reviewing price proposals is crazy, right?

Yet, inevitably, a price proposal will find its way to your desk. Do you just assume it is perfect? Or is there some value you can add to the process?

I’m going to explain how you can review cost proposals, even if you don’t know how to perform the work that’s being estimated. I’m also going to describe why I feel you can provide significant value to the process.

But first, let’s talk in general about price estimates.

An estimate is an educated guess. Let’s say I asked you to estimate how long it would take you to walk an entire block in your neighborhood. You’ve probably walked down an entire block many times. So, how long would that take?

There are a couple ways you could come up with that number.

Gut Estimate

You could make a wild guess (i.e. go with your gut). A good guess might be 7 minutes. 10 minutes seems like too long. 5 minutes seems too short.

The problem with this approach is it is completely baseless. Our gut is often wrong when it comes to time estimates. This is known as the “planning fallacy”.

Relative Estimate

Another way you could do it is to make your conclusion based on a fact you know. For example, you know it takes you 15 minutes to walk to the train station which is 3 blocks away. So, now we’re going to say it takes 5 minutes to walk one block.

The problem with this approach is you have to make assumptions. For example, we are assuming that all three blocks are the full length. But maybe the train station is in the middle of the last block. We’re assuming the conditions we are walking in are the same (It’s not snowing or raining, etc.).

However, the relative approach is going to be better than your gut. It’s based on something we have measured and know to be true.

Industry Statistics

In this approach, you use industry averages. So, you’d say that the average person walks 3 miles per hour (264 feet per minute). Let’s say we find out that the average block is 800 feet. So, the average person would walk the average block in 3.03 minutes.

This is very common approach to estimating in a few industries. The problem is it assumes your task is representative of the average AND your ability to complete that task is average.

That could be a risky bet to make.

Historical Data Approach

The last approach would be to use your own historical data. Let’s say you happen to keep track of how long it takes you to walk each block as you stroll down the street. Then you use historical data from comparable blocks to estimate how long it would take you.

You could also go a step further and run what’s known as a Monte Carlo simulation with this data to determine an even more probable estimate.

Using historical data is absolutely, positively, the best way to estimate. But here is the unspoken truth about price proposals. Very few people use historical data to come up with an estimate. Many, many people, use the first approach…their “gut.”

Many firms, despite capturing this information in their accounting systems, don’t make it easily available to use in estimates.

The argument you might hear against using historical data is that, “every project is different.” While there is a degree truth to that, we also know that gut estimates are deeply flawed.

Logic Flaws

Reviewing price proposals is a bit different from creating them. Reviewing price proposals is all about logic. What you are looking for are possible flaws in logic.

Let’s say the RFP prescribes three on-site meetings. Yet, you notice that your estimate does not include time for meetings. This is a potential flaw in logic that either someone has to explain or needs to be corrected.

How about if your subconsultant has estimated 100 hours, but then $1,500 for milage. You can simply calculate that, at 54 cents per mile, a person can drive 2,777 miles. At 60 miles per hour, that will take you 46 hours. Now, do they plan to spend almost half the time in the car? Or are they not charging for travel time? This is a question that needs to be asked.

Here’s another scenario. Your firm estimates to construct a building for $50/square foot. But you know the industry average is $150/square foot. Why do they think they can build it for a third of the industry average? Maybe they have a reasonable explanation. Maybe they don’t.

What if they estimate that 300 admin hours will be needed during the course of this contract. But you’ve had the contract before and can see that they’ve never used more than 50 admin hours. Why are they estimating 300 now? Has something changed?

Here is another scenario. You know the client has a budget of $100,000. Your estimate is $105,000. That’s another type of logic flaw. Is $105,000 your absolute best price? It’s illogical to assume a client can snap their hands and $5,000 will appear.

There could also be issues with what is not said in the RFP. What if it doesn’t ask for any meetings. You don’t even need a college degree to realize any project will require at least one meeting. Are there meetings in your price? Did you define how many?

How The Estimating Approaches I Described Fit Into This

You’ll need all of the approaches I talked about to identify logic flaws in estimates. You’ll need your gut. You’ll need to compare it to other estimates you’ve seen. You may need to consider industry averages. And, if you can, you should look at historical data.

Your job, as someone reviewing the estimate, is not to tell them what the price should be. It is to identify flaws in logic. It’s to ask questions, listen to the answers, and then identify any logic flaws in the answer.

That’s not only how, but why marketers should review price proposals.

Now it’s your turn. Do you think marketing people should review price estimates for technical work? Leave a comment below.