We are working on the project (IT), but we were puzzled to price project. Does anyone can explain, about what it takes as a consideration in determining the price of a project?
Cost + Fee = Price. Costs include salary and wages of project team personnel, travel, and raw materials needed for the project. The salary and wage of team personnel often times are "burdened" with a multiple that covers general and administration (G&A) costs and overhead (OH) items. For example, if a resource's salary is $100K, that equates to about $50/hour. On top of that, you have costs to cover employee benefits and have some mark-up to contribute to your gross profit margin. The unburdened labor rate might be $120/hour for this resource. Then, you burden this rate to include the multiple for G&A and OH, which is determined by estimating your yearly costs and spreading it logically across your labor categories. Thus, the burdened labor rate for this resource might be $200 to $250 an hour.
You need to have specific definitions of G&A, OH, and raw materials to avoid double costing materials. Your materials will typically have a mark-up, as well, which contributes to your gross profit margin.
Fee is your pure profit and is industry specific. Your fee plus what remains from your gross profit margin becomes your net profit.
How you display this to your customer depends on the type of contract you are pursuing.
From wikipedia: "A resource is any physical or virtual entity of limited availability that needs to be consumed to obtain a benefit from it". For the sake of humanity, could you please call people employees instead of resources?– blubbMay 20, 2011 at 13:42
3From Wikipedia: "Human resources is a term used to describe the individuals who make up the workforce of an organization...." I see nothing wrong with describing employees as resources when you are discussing project capability. This does not mean one would treat an employee without dignity and respect that each of us deserves. May 20, 2011 at 13:52
May I add my 2 cents: You could have a better fee structure if you are able to "show" what value your service/product brings to the table. Note: Value lies in the eyes of the beholder, so think like your customer to know what they value out of your service. What is that you will contribute to increase the overall value of the service to them. This is harder than it sounds, but easier to do with the right questioning and understanding the voice of your customer :) In effect your service should be a value adding service to your customer for you to command/justify your "profit margin"– PhDMay 21, 2011 at 10:31
I want to add one factor to David and Trevor answers that may affect the price of the product. Is the product custom (made for one specific customer) or is it generic (made to fit the needs of many customers). If the product is generic, you have to estimate the product life time in the market (when it is expected to be deprecated and need to be replaced). This parameter with the estimate of number of sales will affect the price. If it is expected to be sold for many customers you may lower the price (may be sometimes to be less than the cost) to give the product marketing advantage and end up with more profit.
1Good catch! That's what I was missing and why I was confused. I was looking at it in terms of pricing the 'project', not the product of the project. May 20, 2011 at 17:47
David gave a great answer. The only change I would add is if your structure is more subcontractor focused, then the pricing model changes slightly. You then wouldn't necessarily have the G&A and OH costs. Then it's subcontractor price, plus mark-up.
I will confess that I'm a bit confused about one point - you have the project, but are just now trying to figure out how to price it? What did you do, or how did you get the job in the first place without providing an estimate of costs?
Are you asking about pricing of a different type?