Systems Pricing

The systems approach to pricing out the activity schedules and the work breakdown structure provide a means for obtaining unity within the company. The flow of information readily admits the participation of all members of the organization in the program, even if on a

FIGURE 14-11. System approach to resource control.

part-time basis. Functional managers obtain a better understanding of how their labor fits into the total program and how their activities interface with those of other departments. For the first time, functional managers can accurately foresee how their activity can lead to corporate profits.

The project pricing model (sometimes called a strategic project planning model) acts as a management information system, forming the basis for the systems approach to resource control, as shown in Figure 14-11. The summary sheets from the computer output of the strategic pricing model help management select programs that will best utilize resources. The strategic pricing model also provides management with an invaluable tool for performing perturbation analysis on the base case costs and an opportunity for design and evaluation of contingency plans, if necessary.


Not all cost proposals require backup support, but for those that do, the backup support should be developed along with the pricing. The itemized prices should be compatible with the supporting data. Government pricing requirements are a special case.

Most supporting data come from external (subcontractor or outside vendor) quotes. Internal data must be based on historical data, and these historical data must be updated continually as each new project is completed. The supporting data should be traceable by itemized charge numbers.

Customers may wish to audit the cost proposal. In this case, the starting point might be the supporting data. It is not uncommon on sole-source proposals to have the supporting data audited before the final cost proposal is submitted to the customer.

Not all cost proposals require supporting data; the determining factor is usually the type of contract. On a fixed-price effort, the customer may not have the right to audit your books. However, for a cost-reimbursable package, your costs are an open book, and the customer usually compares your exact costs to those of the backup support.

Most companies usually have a choice of more than one estimate to be used for backup support. In deciding which estimate to use, consideration must be given to the possibility of follow-on work:

• If your actual costs grossly exceed your backup support estimates, you may lose credibility for follow-on work.

• If your actual costs are less than the backup costs, you must use the new actual costs on follow-on efforts.

The moral here is that backup support costs provide future credibility. If you have well-documented, "livable" cost estimates, then you may wish to include them in the cost proposal even if they are not required.

Since both direct and indirect costs may be negotiated separately as part of a contract, supporting data, such as those in Tables 14-8 through 14-11 and Figure 14-12, may be necessary to justify any costs that may differ from company (or customer-approved) standards.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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