One of the most profound problems facing even successful freelancers and small businesses is deciding how to estimate their costs when they submit a bid for a job. There is always a palpable downward pressure on every number that comes to mind, because most businesses presume their competition is going to be able to gladlybeat their price and acquire an insurmountable advantage.
The reality is quite a bit less dramatic, but it doesn’t absolve the business of the need to correctly estimate their costs. Underbidding on your own work is nothing short of creating an automatic loss for your company. So how do you best approach this process?
The Rule of Threes
Believe it or not, the rule of threes isn’t just limited to art and television. Every project should be estimated using the rule of threes, and the eventual price charged to the client or customer should adhere to this rule to prevent any possibility of lost money.
To employ this rule, a business should total all their hard costs for a project and add 15% for unexpected expenses. Then they should triple the result. The tripled number is the retail cost of the project. In negotiations, they can cut a third from their price, but they must never go below twice their costs.
The Unexpected Fee
One of the oldest adages in business is “double the time, triple the money.” This is a good rule of thumb, but it fails to take into account the possibility one or more of the major costs of the project might either be underestimated, overlooked or turn out to be just plain wrong. It also avoids the possibility of a completely unexpected expense in mid-project.
That is the reason for the 15% cushion. It is especially helpful in situations like large job cost estimates because it ends up being tripled by the time the final price is quoted.
The Double-Edged Price
Contrary to popular belief, having a higher price is not automatically a disadvantage. Plenty of companies make their living charging more than the market believes is the right price. Their response is usually to shine a spotlight on the quality level of their product. That is often the best approach to balancing price with competitiveness. Sometimes the competition insists on throwing themselves to the wolves. When that happens, there’s nothing you can do except preserve your company and wait for the next opportunity. There’s always another opportunity.
Negotiation is really a numbers game. Failing at one bid usually means the next great project is one pitch closer. Also, remember that every great deal starts with “no.”