How To Price Contracts

Need help in how to price contracts or bids? Here is a simple way in Excel that may help. Continue reading or download the contract pricing model now.

Background: How To Price Contracts

Assume we produce widgets for sale. The widget could be a manufactured product or it could be a service. It takes time to make each one. In our case, it takes 30 minutes per widget. There are 4 employees involved producing widgets with varying pay rates. We are estimating how much to charge for a weekly contract producing 50 widgets.

Estimating Labor and Materials For Our Bid

First, we figure out how many minutes of labor are going to be needed to product these 50 widgets. In our case it is 50 widgets * 30 minutes each = 1,500 minutes per week.

Next we determine the amount of effort per employee involved. I like to think of it as a % of total effort. In this case, Allison does a little over 50% of the labor while Dominic only provides 12%. We keep adding minutes per person until the total minutes adds up to 1,500 above.

Next, add hourly rates to each employee. These rates can vary — in our example, Bill makes $8 per hour while Chris makes $50. Since we know the total number of minutes and the rate, we have our estimated weekly labor cost: $627.

Now that the labor component is priced we need to account for the raw materials. We estimate these at $5 in material, $0.75 in parts, and $0.50 in glue for each widget. When added together with out $627 in labor, our total cost to produce 50 widgets is $940.

Estimating Margin for Contract

The last piece is estimating our margin; you might think of it as the markup. In our business we decide we need 50% margins for this contract. That means the amount of the contract needs to be $940 * (1 + 50% margin) = $1,409.

Estimating the appropriate margin for your business can be difficult. If you request too high of a margin you might lose the deal. Conversely, if you charge too little margin the business not end up being worth your time — which could lead to performance or morale issues.

Contract Example in Excel

Here is a screenshot of this contract model in Excel:

How-To-Price-Contract-Excel

You can customize this model for your own purposes as well. Click here for a free download of the contract pricing model in Excel.

Hope this simple example helps you when pricing out bids or contracts. Please leave any comments below.

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