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I'll Never Do THAT Again!

Friday, March 12, 2010   (2 Comments)
Posted by: Loraine Kasprzak
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by Bill Dorman, CMC Emeritus

The title of this column comes from the Aircraft Owners and Pilots Association (AOPA) magazine that I have subscribed to for over 25 years. Initially, columns (stories) were written by an editor and later by individual pilots who contributed those "I’ll never do that again” moments. Their personal almost tragic experiences and what they would do differently in the future were highly valued since you don’t find those real life situations along with preventive measures in the "manual”.

Here is one of my earlier – and less than successful – consulting experiences. This deals with negotiating a price for the redesign and integration of the invoice portion of a total midsized retail store sales system. The client said they wanted to redesign the entire system in the near future, but needed to change the invoicing application right away due to changes in credit terms. I was promised that if I came in with a very competitive price (read "cheap”) then my company, assuming what we did worked, would be chosen to redesign the entire system. (You see what’s coming, right?) I needed the revenue right away to meet payroll and pay the rent. Of course, I envisioned a large contract in the future that would last for over a year. Already I have myself on the INC 500 list. What does a new consultant like me, who was not a member of IMC at the time and did not have the benefit of training, do? I proposed a low price that barely would breakeven. We "won” the contract and when finished we were given the "I’ll call you later” routine to do the larger project. You guessed it. We didn’t get any future work from that company.

This could have been avoided by first me having a clear understanding about the fundamentals of pricing whether its cost or value based and then proposing an acceptable cost plus profit. If total price is an issue then negotiate on what work or expense the client is willing to take out of the proposal. Competitiveness, relationship with the client, project difficulty including potential issues not clear at the outset, your company consulting rates and overhead will help you decide the final negotiated price. If I had done that the pain would have been far less. After I price-valued the project and profit, I could have included a paragraph in the engagement letter that clearly stated that the cost of this project includes a new client promotional discount that did not apply to future work. However, in the real world, once you lower your price without changing the statement of work, for any reason, it’s 99% likely you won’t be able to raise your base price for that client in the short term. Some old timers quote the adage "you charge what the client will pay” but that flies in the face of professionalism and discounts your real value and internal pricing model. Importantly, what the client will pay may not be in its best interests.

Is this what you would have done? Add your comments and insights below. Better yet, send in your own "I’ll Never Do That Again” experience and solution to for possible publication.

Next issue, we will discuss a situation that even a well defined contract didn’t help.


William J. Dorman CMC-Emeritus says...
Posted Monday, March 22, 2010
Michael Cohen's excellent advice follows along the traditional cost plus factors. On top of that one might consider the value of your work to the client based on client's importance of the outcome and investment/costs involved.
Michael E. Cohen CMC MBA says...
Posted Wednesday, March 17, 2010
I hope you did what I think you did. That is before submitting a proposal developed a detailed estimate of what the project would actually cost for you to perform based on who would do the work and your billing rates. This usually requires developing a person loading table, indicating the estimated hours required for each task or subtask for each labor category. This will give you the total estimated loaded labor costs. To this you would add your estimated other direct costs (ODCs), e.g., travel, commuhnications, etc. Once you ahve this, then you can develop your pricing strategy. For example, regardless of the potential for future work, you wouldn't want to go mcuh below your estimate of the actula cost to perform the work. Having the detailed estimate allows you to adjust your pricing strategy based on the degree of competition, potentail for other work, risk, etc. Since it reflects analysis of time by task, it is also useful in adjusting your price based on scope changes.

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