Direct and Indirect Costs: 2 items that determine tender pricing
Article by Werner van Rooyen
13 October 2014
Many bidders that respond to tenders struggle when it comes to calculating a price for a specific tender. One of the reasons for this is that a large number of small business owners are usually new to the tender process and therefore they lack the necessary experience to price their bids correctly.
Without getting into the fundamentals of accounting there are two basic items that determine your tender price. In fact, these two basic items should always be your guide when determining your price on the goods or services you sell.
The two items that determine pricing are:
- Direct Costs; and
- Indirect Costs.
- Direct Costs
Direct Costs are the costs that one pays to either:
- Produce goods or services; or
- The cost price you pay to procure goods or products that you will resell to your customers.
In other words, if you manufacture wooden chairs your direct costs will be the money you spend on purchasing the wood for the chairs. Other direct costs in manufacturing wooden chairs would be wood glue, nails and labour costs.
Thus, when responding to a tender you must take the utmost care that you include all your direct costs in your tender price.
- Indirect Costs
Indirect Costs are the expenses that you incur to run your business, these costs do not necessarily generate any income. Some of the most common indirect costs that your business incurs are:
- Utility expenses such as electricity and water
- Salaries and wages
- Accounting fees
It is very important to include indirect costs in your tender price. Remember that the tender will form part of your normal day-to-day business and therefore it must contribute to your indirect costs.
The question is how to calculate how much of the indirect costs are contributable to the tender. There isn’t one specific rule but one of the more common rules is to estimate the time spend on servicing the tender and then use that to factor in the indirect costs into the tender price. In other words if you have to spend 50% of your time servicing the tender then 50% of your indirect costs should be part of your tender price.
Please visit our website at www.how2tender.com for more on these as well as other interesting topics. You will also find our Tender Manual there - the Tender Manual guides you through the whole process of responding to a Tender or a Request for Proposal.
Until next time.