Estimates vs. Costs
By Mike Kind on January 21st, 2010
One of our companies recently had an estimating quandary. Sales had a tendency to attempt to “cut corners” in the estimate because they felt the price was too high and made them uncompetitive.
They would increase run times, reduce allocated times for production and eliminate certain functions all together (such as proofing) if they felt they were unnecessary.
Production became frustrated because data collected on specific jobs produced wide variances due to the shortcuts put forth in the estimates. Needless to say, the tension between sales and production escalated rapidly.
The outcome to this dilemma was pretty straight forward. There are three components to a job –
- The estimate – Which is determined by compiling all necessary functions to complete the job.
- The cost – Which is derived by collecting the actual data to produce the job comprised of time and materials.
- The price – Which is determined by sales based on “what the market will bear”.
A job should be estimated to include all required costs and operations to produce the job and sales should then provide a discount if necessary to arrive at the price of the job. Production should not really be concerned if a job is estimated at $1000 and the price of the job supplied to the client by sales is $500. The accountability is on sales to provide a reason as to why certain discounts are given.
Production needs to have the real estimate for the job as this allows for an accurate analysis of estimated vs. actual costs. The price of the job should be determined as a line item discount off of the estimate.
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6 Responses to “Estimates vs. Costs”
By Norman Marks on Jan 22, 2010 | Reply
If printing companies are not considering ‘factuals’, i.e. absorbing indirect costs along with their direct costs, when producing an estimate then they are open to huge risk when negotiating. “Wetting the finger and sticking it in the air” is too common a practice. Sales personnel should be instantly aware of the limits within which they can move – for each job. Some jobs must simply be turned away. If in doubt, ‘get real’ and purchase a proper MIS that considers all the cost elements. In printing, the only money to be made out of ‘lottery’ is printing the tickets.
By Don Goldman on Jan 22, 2010 | Reply
Historically, the pricing of a job was adjusted by the estimator who could influence the results by adjustments in estimated hours. From this point sales often make further judgements on the dollars based on gut feelings or competitive expectations. In a well run company the estimator plans the job for using the best manufacturing method to achieve the desired quality level including the substrates and materials used. The cost is fact.
Pricing is strategy. Printing companies should have a pricing administrator especially for custom printed jobs over a determined threshold. Pricing is often a matter of market knowledge and the relationship of the printer to its customer or prospect.
It often bothered me that my quotes would be sold for less than the estimated costs. But in reality the estimator uses budgeted hourly rates that are predicted based on utilization of a cost center and at any time are not a reflection of real costs. The days or weeks the plants are extremely busy with sold work reduces the hourly cost while slow times increases them. If a job is sold for less than the estimated cost to fill the plant it will have the effect of lowering the cost. Again this is strategy.
To the point that Mike makes we should not get hung up on the comparison of estimated costs with the selling price. The real comparison should be whether the planned time meets the actual time and if the out of pocket costs are equally comparable.
By Dave Gahn on Jan 23, 2010 | Reply
I agree completely with this. I was taught early in my career that price’s job is to capture value. No question we need to compare a target price to costs to understand margins, but as you point out there are a lot of moving parts related to costs. Using a complex pricing model is no assurance of getting to the right price. Understanding your customer and the market is.
By Michael J on Jan 24, 2010 | Reply
I wonder what happens to this issue given the many commercial printers that are using price lists, e.g printingforless.com and many other web 2 print functionalities.
Is it possible that we are moving to a world of prices set by the market, and costs determined by how efficient is the manufacturing.
By Richard Fergusson on Jan 25, 2010 | Reply
Back in the 90’s the British Print Industries Federation decided to move away from the standard ‘absorb your indirect costs, forecast the monthly usage, work out the likely cost and add a percentage’ advice. They moved towards a marginal costing model that seemed to be based on ‘we’ve covered our costs this month, so we can really slash the prices as all the added value is now profit’.
They soon had to switch back to more conventional thinking for a variety of reasons. Apart from the fact that the customer will expect the silly price next time, it usually means that your projected usage figures are rubbish. So part of the management function is to continually review those costs in the light of actual usage figures.
As Don says, above, if the presses are always full, the price per hour will come down automatically, so the total cost used for the estimate will come down. But to reduce prices to below theoretical cost purely because ‘the market’ says so is crazy.
I know of at least one company who took the decision _never_ to do a job below theoretical cost ever again. So they lost a few long-standing customers, but in the process they found that they were actually working slightly less, but with a higher profit to bank.
Turnover is vanity, profit is sanity!
By Dunen Francis on Feb 2, 2010 | Reply
Surely this is a fundamental of running a business? Working out your overheads and running cost, plus the cost of materials and labour are something that every company, no matter what industry, should be able to perform as a daily activity? I’m never suprised to hear that yet another print business has gone under when you hear people saying “I dont know how they were so cheap – we couldn’t even buy the paper for what they were charging!”. Exactly.