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Chap 14

The document outlines various pricing strategies and estimating methods for different types of acquisitions, focusing on Type I and Type II acquisitions with specific objectives and cost estimation techniques. It discusses the importance of overhead rates, pricing reports, and the challenges of low bidding, particularly in relation to project credibility and competition. Additionally, it highlights issues faced by the Percy Company regarding small project cost estimating and the need for formal procedures to improve cost management.

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sammush79
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16 views15 pages

Chap 14

The document outlines various pricing strategies and estimating methods for different types of acquisitions, focusing on Type I and Type II acquisitions with specific objectives and cost estimation techniques. It discusses the importance of overhead rates, pricing reports, and the challenges of low bidding, particularly in relation to project credibility and competition. Additionally, it highlights issues faced by the Percy Company regarding small project cost estimating and the need for formal procedures to improve cost management.

Uploaded by

sammush79
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Pricing and Estimates

• ART
– Experience
• Science
– Decisions
– Cost Estimating Relationships
• Math equations/ regression equations
• Cost-quality relationship
• Cost-cost relationship
Global Pricing
• Pricing strategies (Depends upon objectives)
– Type I Acquisition:
• One of a kind program with little or no follow-on
business
– Type II Acquisition:
• New program with potential for large follow-on
business or representing a desired penetration into
new market
Global Pricing
• Type I Acquisition:
– Develop cost models and estimating guidelines
• OBJECTIVES: Min cost & min customer reqs.
– Estimate cost realistically for min reqs.
– Determine cost realistically from performing
organizations
– Adjust cost estimates for risk
– Compare price to customer budget and
competitive cost information
– Bid only if price is within competitive range
Global Pricing
• Type II Acquisition:
– Design baseline w.r.t. customer reqs.
• OBJECTIVES: Innovative + Low risk
– Estimate cost realistically
– Minimize cost ; scrub baseline.
– Determine realistic minimum cost; obtain
commitments from concern organization
– Determine should-cost and Gross profits
– Determine most -likely winning price
Types of Estimates
• Order of magnitude
– w/o engineering data; experience/ scaled
• Approximate estimates
– prorated figures from similar projects
• Definite estimates
– Well though off using data, covers almost every
aspect
• Learning curve estimate
– Graphical; repetitive functions in which a continuous
operation leads to reduction in RCM
Pricing
• Work breakdown structure => pricing for each
• Activity schedules => price
• Lowest pricing unit.
– Accurate and meaningful data
– Information be priced at the lowest level of
performance.
– Man hour => past standards
• Analyze cost impact on company; resource,
money, equipment & facility
Overhead Rates
• Overheads $ are also as important as tracking
labor hour and cost.
• Track overheads cost frequently.
• How to calculate overhead rates:
– OH Rates= f(direct labor rates, direct business base
projection, projection of overhead expenses)
• Overheads includes:
– Building maintenance, rent, holiday, consulting, sick
leave, utilities etc.
Pricing out the Work
Define work Review WBS
requirements with Functional Organize team
manager with functional
manager Document result
Establish logical
network in a program
Decide on Develop linear plan
basic course of responsibility
Develop the work action chart
Price review if
breakdown
necessary
Establish cost Develop detail &
forWBS PERT/CPM
Price-out the elements schedules
work breakdown
Establish
Review cost with
pricing cost
upper
summary
management
Pricing Reports
• Cost breakdown for WBS
• Man power curve for each department
• Equivalent manpower cost summary
• Cost distribution table
• Functional cost and hour summary
• Labor cost and $ expenditure forecast
• Raw material and expenditure forecast
Low Bidding
• What price will WIN the the project?
– Difficult to use decision theory because of
complexity and uncertainty.
– SO what do you we do;
– BID LOOOWW
WILL IT WORK
Low Bidding
• May perceived by customer un-realistic;
effecting credibility or tech ability
• Price irreverent to bid objectives => cost
sharing
• Price should be relative to
– Competition price
– Customer budget
– Bidder’s cost estimates
Special Problems
• Work is priced out at the department
average and all work performed is charged
at the department average salary: Easy
• Work is priced out at the department
average but all work performed is billed
with actual salaries: Problems
• Work is priced out at the actual salary and
cost is billed back that way: Ideal but
difficult
SMALL PROJECT COST
ESTIMATING AT PERCY
COMPANY
Synopsis:
• One of the biggest headaches, but necessary evils, is
the detailed cost estimating and planning before any
project can be implemented. On small projects which
may include just one or two people, the project
manager is permitted to price out the job him-self.
Now, if an overrun occurs, who is at fault? The
problem con-fronting the Percy Company, and Paul, is
the absence of formal procedures for estimating small
project costs. Solutions to the problems will be
discussed after analyzing how normal project and
small project costs are estimated at the Percy
Company.
SMALL PROJECT COST
ESTIMATING AT PERCY
COMPANY
• Should Paul have been permitted to price out the
jobs?
• Should Paul have shown his estimates to the
functional managers for their blessings?
• Can this situation be corrected for small projects?
• Should line managers be willing to price out small
jobs using their line organization overhead cost
account?
• What are the long-term problems in the case study?
• How can the lack of project planning and controlling
through-out the life of a project affect the end cost
of the project?
POLYPRODUCTS
INCORPORATED
The students should describe the work-breakdown structure
and respective hours/department/task/month. The student
must then determine the following:

• Cost of labor (should we use higher priced people who can


do the work in less time or lower priced people? What are
the trade-offs? Are sufficient resources available?
• What is the cost of the raw materials? What is the delivery
rate? What scrap factor should be used on a project as
this? What are reasonable escalation factors on rubber
components? Where did you obtain your information?
• What is the PERT diagram?
• What is the total program cost?

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