Navigating Project Pricing: Strategies for Consultant Project Managers

Every consultant project manager will be involved in pricing projects for sales pitches. The ask is often from the sales team that has agreed to produce the sales pitch with too little time and incomplete information. To compound the challenge further, there is no playbook for this type of project estimation. The primary project management methodologies pay little attention to this scenario.

These projects are often waterfall or pseudo-agile, sometimes called “wagile”, when agile techniques are used to deliver a predetermined scope.

No single pricing process will cover all scenarios. The customer context and project type drive the most appropriate pricing model. These factors must be considered and mixed together to form a pricing strategy.

What Is Being Priced?

This may seem an obvious and unnecessary question, but it is worth being clear from the outset.

There are three categories of project pricing:

1. Service Project Pricing. This is typically priced on the effort to deliver the project. For example, the project is estimated to take 100 days at a charge-out rate of £950/day. Therefore, the project price to the customer is £95,000. This type of pricing is common in IT consultancies. Typically, the sales team want the project manager to break the project down into estimate-able activities and estimate them to provide a figure for the effort. The sales team can then apply the rate card and discounts applicable to the customer. Commonly, this is done on spreadsheets that have been standardised and refined by the organisation. The pricing spreadsheet calculates the project margin and provides guidelines to keep the margin within the target. This pricing model directly links time with price.
2. Product Project Pricing. The service can be termed a product when selling a repeatable service to many customers. For example, a designer providing a service to build a website for a fixed fee will be a service. Strictly speaking, this is not a project as it’s repeatable and not unique. The price for the product will have been calculated based on the effort to provide the product to past customers. This pricing model de-links time and price. Back to our website build example, if the product assumes every website build will take 3 days to deliver, taking less time is excellent; effectively, you are increasing your day rate. However, if the build takes longer, your effective day rate is reduced, and you cannot work on other customer projects, so there is an additional missed opportunity cost. So, getting product pricing right when a significant element is time is very important.
3. Product with a Service Project Pricing. The final pricing model is a mix of service and product. This will be a situation where a customer buys a standard product but then needs a complementary service associated with the product. For example, for a Salesforce consultancy, deploying a standard version of Salesforce will be a repeatable product with a service offering to configure and enhance Salesforce to fit the customer’s specific needs.

Once the pricing type is known, the offering and customer characteristics can factor in.

Estimating For The Unknown

Every project will diverge from plan to some extent. Tasks will take more time or less time than estimated. Activities may have been missed entirely in the forecast. Or the customer wants additional features, causing more cost.

All project pricing must include an element of leeway for the estimate being wrong. Predicting project costs requires knowing the future exactly, which is impossible. If it were possible, I would have correctly predicted the weekly lottery numbers by now. So don’t beat yourself up about getting the estimate wrong; it’s part of the job. Instead, have strategies for effectively managing it.

There are three categories of estimate variance.

1. Just getting the estimate wrong. It takes a lot of work to get a spot-on estimate. So, having tasks that take longer than planned happens all the time. Every plan and estimate needs to account for this. I do this by adding a contingency to each task. Sometimes, this is just a percentage uplift for the whole project. Other times, the contingency added will vary based on the confidence of the estimate, the resource allocated to the tasks, or the novelty of the activities, for example, if it uses an unfamiliar technology.
2. Missed activities. Sometimes, the estimates will miss an entire activity or set of tasks. The work is in scope and needs to be done; you did not know or realise that when the estimates were prepared. It only happens for some projects. But it happens enough to require planning. To account for this scenario, I add a price factor called allowance. This is usually a percentage across the whole project estimate.
3. More scope. In this scenario, the customer requests a feature or addition not included in the original scope. Therefore, it has not been estimated. This situation is the easiest to deal with in terms of estimating. It was not known at the estimation stage, so it needs to be added to the project costs and price. Exactly how responsibility for the additional costs works in practice will be unique for each customer situation. What is important is that the estimate is updated so the project is measured against the revised budget and not the original costs.

When pricing a product, an element of contingency and allowance must be built into the product price. For service pricing, including contingency and allowance will depend on the customer and project characteristics.

Fixing The Price

A product project will be a fixed price. For service projects, you have a choice:

• Fixing the price.
• Providing a price estimate and then charging for what the project actually uses, called time and materials (T&M).
• Pricing as capped T&M where an upper price limit is provided and the project charges below or up to, but not above, the price limit.
• Project supplier and customer share the underspend or overspend, called shared risk/reward.

Each approach changes the price risk profile between the project supplier and customer.

• Fixed price. The supplier takes all the risk for the costs and price. If the project takes longer than planned, the supplier bears the additional costs. Conversely, if the project takes less time than estimated, the team finishes early and can be allocated to another project.
• Time & materials. This is the opposite of fixed price. If the project is completed earlier or later than estimated, the customer takes all the price risks with corresponding gains or losses.
• Capped T&M. In this scenario, the supplier takes the risk if the project is over-estimated. If the project is underestimated, the customer keeps the corresponding price reduction.
• Shared risk/reward. The supplier and customer share the savings or additional costs if the project is completed under or over the estimate. The risk is equally shared, making this approach attractive, but the setup is complicated to govern when parties may look to pin responsibility for additional costs.

All commercial contracts will state the price type. The main implication of the price type is the allocation and amount of contingency and allowance the project supplier adds. For fixed-price contracts, more contingency and allowance will be added as there is no method to recover underestimated or missed tasks. For time and materials, less, if any, contingency and allowance will be added. However, the customer may add a contingency budget to their costs to cover variations in the project price estimate.

How Well Do You Know The Customer?

The quality of the relationship between the project supplier and the customer will influence the price type.

If a new supplier-customer engagement where trust has yet to be built, then a fixed price might be a good way to set up the first project. Trust can be created during this project, and follow-on projects can be shared risk/reward.

Project pricing for a new customer or in a highly competitive environment might result in the supplier discounting the project price to win the project. This is especially true when there may be follow-on work that is likely to be less competitively tendered for, and the supplier has built some trust with the customer.

Pricing The Customer

A Gucci bag does not cost near the £2,000 price tag it sells for. The same is true for most supercars and high fashion. And customers know this. So, how do these brands charge such prices? They price their products for their customers.

Their customers and potential customers expect to pay high prices for these products, so they are willing to do so. They are eager because of product scarcity, quality, reputation, or a combination of these.

Project suppliers can do the same by being seen as the experts in their field. This can be done by publishing content, conference speaking and past project successes. Being an expert builds reputation and scarcity because not everyone in the marketplace will be an expert.

Recognised expert project suppliers are able to charge premium prices. The supplier will have more opportunities than time, so the supplier can pick and choose which customers to work with. This will create scarcity and customers willing to pay the premium prices.

These price factors result in the supplier playing in a customer environment where the customers have more money to spend and higher budgets. So the supplier can price to these customers, like Gucci.

This is a relatively advanced pricing practice. It should only be used when recognised as an expert and well-versed in using the other price factors.

Margin, Profit and NPV

Margin is the difference between the cost of the project and the price sold. For example, a project cost of £55,000, which is sold for £75,000, has a margin of £20,000. All commercial project consultancies need projects to return a positive margin. A negative margin is a loss on the project. Consultancy project managers need to not only deliver the project goal for the customer, they also need to deliver a positive margin to the consultancy.

Margin is different to profit. The margin does not include other costs like cost of sale, office rent and so on. Often, consultancies have project margin targets that they know through experience will deliver a profit to the organisation.

Occasionally, projects require NPV to be calculated. NVP stands for Net Present Value. NVP is the difference between the present value of the cash invested in the project and the financial value of the completed project over time. Basically, NVP determines if it’s best to leave the project costs in the bank and gain interest or if the cash will generate more money by delivering the project. The principles underpinning NVP are simple. You can find the formula online. The formula is complex but can be easily added to spreadsheets.

If used, NPV calculations are used by project customers or in-house IT projects. A consultancy project manager is unlikely to calculate NVP for a customer project as access is needed to customer internal financial information.

Wrap Up

Pricing up projects is a regular activity for consultant project managers, so understanding the various pricing models and their impacts is a crucial skill.

In this article, we have explored the levers a project manager can pull on when pricing a project, what can go wrong and how they can be avoided. We discussed how tacit knowledge of the customer can influence pricing and the impact marketplace expectations can have on pricing. Finally, we highlighted for a consultancy project manager the delivery of the project margin is a dual aim with the project goal.

I hope you have enjoyed this article. If you have any comments and feedback, I’d love to hear them; please get in touch or comment below. Thanks.