Pricing

Supplier Quotes for Estimating

Vikas Khaitan3 Comments

One of the important steps during any estimate preparation is obtaining supplier quotations. Some pricing is based on in-house data from past projects or previously obtained budget quotes, but there is generally a requirement to get latest market pricing for high value items to increase the accuracy of any estimate. The time to obtain these quotations is mostly built into the estimate preparation time. On many occasions, this time may appear inadequate and the team could be unsuccessful in obtaining any meaningful and usable quotations to be included in the estimates thus affecting the estimate accuracy.

In this blog, I will first discuss what tends to be the general approach for obtaining quotations at the estimating stage of any project, and then I will propose a method for making this process more efficient to fit with the available estimate preparation time.

One of the issues I have noticed as part of many teams is the format in which the request is sent out to the suppliers. The requirement, scope descriptions, specifications etc. are sent to the supplier without any pricing format / tabulation to be filled. Every supplier thus interprets the client’s requirement in a different way and submits a priced quotation in varying formats. It then takes a long time to understand the overall pricing being quoted by the suppliers, obtain clarifications if required and then normalise the scope to compare them on an equal footing. It is always a challenge to tabulate, compare, analyse and then suitably use the quotes, in the estimate.

I propose that the estimator should support the engineering/ procurement team in developing suitable tabulations of the required scope to be sent to the suppliers. If all the suppliers are given the same price schedule in an Excel format for example, when the prices come in, it would be an easy task for the team to tabulate the submissions from the various bids and compare them against one another. Any duplication of effort would be immediately removed from the system. No time would be wasted in trying to copy each line item and its quoted price into a spreadsheet. Any comparison and further analysis would become much easier. Any adjustment to the scope and quantities would be easy to make as well. It would reduce the time for any clarifications and bid evaluations, thus allowing the estimate preparation to be completed within time and with a high accuracy.

Case in point

Long ago, when I joined an estimating team of a company, I found that the very detailed quotes which we received from various contractors for fabrication of our equipment, varied widely in terms of the format in which they were quoted. This was partly down to us; we as a team were not very clear in our scope description, hence the quotes were also not very clear on what was included. Small things like painting was sometimes missed out from the bids, or it was not clear if the lifting lugs for transportation and site installation were included or not, or if anchor bolts were missed out. The small items when combined did make a difference to the bottom line and the estimates could end up either double dipping on those items or missing them out completely. We had to have several clarifications before we could compare the various bids and it sometimes took weeks or even months. I realised there was a problem and it affected our ability to produce effective estimates in a timely manner. I helped the team develop a simple excel format to go out to the contractors for pricing for any new enquiries and the template included all the information we needed all suitably tabulated. This then made it easy for the various bidders to quote their prices, quick and easy for us to check if everybody quoted all the items, and even easier to compare different bids and then suitably include the costs into the overall estimates. We reduced the overall time from weeks / months to nearly less than a day for the whole exercise once the contractors’ quotes came in.

I have now made it a practice to help any new team I work with, to develop suitable formats to obtain quotes so that it makes it efficient for everybody involved. If you do not do this already, I would highly recommend it.

Attached is a dummy format in excel for reference.

20161026-dummy-price-schedule (free resource)

Difference in Estimate Vs Bid Price

Vikas KhaitanLeave a comment
2–3 minutes

Sometimes we receive very different commercial bids for the same scope of work and it becomes difficult to ascertain which bid is right. The important point to note here is that the price quoted may not always be explained by scope or estimating. It may be purely a management decision with no bearing on the estimated costs.

For example, even if all costs are assumed to be same for the different bidders, they could still quote different prices for the same scope of work.

The table below illustrates the point:

Note:

  • Different bidder could have a different perception of risk and could end up adding different contingencies to their bid price (or sometimes even none).
  • Bidders could have different management requirement of the expected margins from future business. These could be a function of the market condition, current workload, expected workload and repeat business, etc.
  • For exactly the same scope it is a very possible situation when one bid is around 50% more than the other bid. (See illustrative table above). And this can be easily explained by the amount of contingency and profit added to the base estimate in the pricing.

Case in Point: One management decided to bid “at cost” without adding any contingency or profit. Market was bad, the company had not won new business for a considerably long time, option was to downsize and wait for the market to improve. But the management decided to win new business at bare costs, to at least pay off the salaries but also to gain entry into new markets and develop their reference list and new customers. The strategy worked and the company actually made some profit as they put their best people to work on those projects. And they won new business at better margins on the back of those projects.

Furthermore there definitely could be differences in the base costs of different bidders based on the following factors:

  • Material supplier base
  • Supply chain management
  • Labour availability
  • Other resource availability
  • General overheads

These factors could sometimes reduce the base cost for some bidders and depending on their pricing strategy could increase the differences between the bids even further.

I personally do not see any harm in awarding the contract to the lowest bidder if they are considered technically suitable by the team. Higher pricing does not necessarily mean better quality. We should always be evaluating bids on their technical and execution strength first. The commercial evaluation team should not get alarmed with the huge variation in pricing between the bids. An internal check estimate of the bare costs could help during these times to ascertain the bare costs for the scope of work.