Using the right cost model for your contract

I thought I would share some thoughts on the various types of cost models used in business, including fixed, variable, and mixed costs. It is important to understand how to calculate these costs and how they can be used to make informed business decisions. In addition to their application in business, cost models are also commonly used by councils and government agencies when determining budgets and contractor pricing.

There are several different formulas that can be used to evaluate pricing as part of a tender process, including:

1. Cost-plus pricing: This involves determining the cost of goods or services and adding a markup to arrive at the final price.

2. Competitive bidding: In this method, businesses submit sealed bids and the lowest bid is chosen as the winner.

3. Target pricing: This involves determining a target price for the goods or services being offered and then working backwards to determine the cost of goods or services required to achieve that price.

4. Value-based pricing: This approach involves determining the value that the goods or services will bring to the customer and setting the price accordingly.

5. Life cycle pricing: This approach involves taking into account the entire life cycle of a product or service, including the cost of development, production, marketing and distribution, when determining the price.

6. Skimming pricing: This approach involves setting a high price for a product or service when it is first introduced to the market and then gradually lowering the price over time.

7. Penetration pricing: This approach involves setting a low price for a product or service when it is first introduced to the market with the goal of capturing market share.

8. Bundle pricing: This approach involves offering several products or services as a package deal at a discounted price.

9. Cost-plus-a-percentage-of-cost: This approach involves determining the cost of goods or services and adding a markup, usually a percentage of the cost, to arrive at the final price.

10. Cost-plus-fixed-fee: This approach involves determining the cost of goods or services and adding a fixed fee, usually a flat dollar amount, to arrive at the final price.

11. Reverse auction: In this method, businesses submit sealed bids and the price is gradually lowered until a winner is chosen.

12. Quality-based pricing: This approach involves setting the price based on the quality of the goods or services being offered. Higher-quality goods or services will be priced higher than lower-quality goods or services.

13. Time-and-materials pricing: This approach involves charging the customer based on the actual time and materials used to complete the project, rather than a fixed price.

14. Dynamic pricing: This approach involves adjusting the price of goods or services based on real-time market conditions and customer demand.

15. Sealed bid pricing: This approach involves businesses submitting sealed bids and the winner is chosen based on a combination of price and other factors such as quality, delivery times, and warranty.

With the risk of rising Consumer Price Index (CPI) rates (currently hovering around 7%), it is important for councils to have a clear understanding of the potential impact on contractor pricing. By utilising the most advantageous cost models, councils can better forecast and plan for potential cost increases and make more informed decisions when it comes to contracting services.