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How to Evaluate Both Time / Materials and Fixed-cost Bids

Which type of project estimate offers you the greatest flexibility?

 

Assessing proposals from competing firms doesn’t have to be a daunting challenge. The process is relatively straightforward with attention to two factors: a clear description of what the bid actually does and does not cover, and a better understanding of the distinctions between fixed-cost, and time and materials estimates.

 

Customers don't want to be overcharged.
Prospects request estimates to budget projects and for assurance they won't be overcharged.

 

Regardless of the cost structure, confusion strikes when there is a wide variance between bids. When competing companies propose prospective costs for the same job, the estimates should be within 30%. If not, it's usually because the scope of the project was either unclear or open to interpretation. It could also serve as an alert that a  significant portion of the project was not foreseen or taken into account by one or more parties.

 

Project managers want to get a handle on costs.
Project managers would appreciate capturing all project costs with fixed bids. Seemingly, issues like under-funding, and contractors exceeding budgets would go away. It sounds like a worthwhile objective, but there are many reasons why a fixed cost bid contract is not the preferred way to develop a complex medical product. Developing a concept into a robust and manufacturable product involves too many variables.

 

It's not possible to predict with sufficient accuracy, the feasibility of integrating or applying a core technology into a new application or unproven system. "It makes sense that if your project has a feasibility component or requires research and development, a fixed-cost bid is an educated guess at best", explains Bill Taylor, past Director of Engineering at Omnica.

 

Incidental engineering changes, modification of marketing requirements, material costs, component availability, and controller’s fickle funding allowances are inherent promises of the dynamic process.

 

Factoring in the unknown can be a huge variable for a fair estimate.
Factoring the unknown into fixed-cost bids makes them less reflective of the actual expense of developing a product. "Firms who offer fixed bids on highly technical projects are compelled to pad projected costs for unforeseen design changes and opportunities", continues Bill. For projects like this, a realistic time and materials estimate is probably the most cost-effective way to execute your concept. "It gives the product developer and the client the latitude to explore options and to deal with unforeseen challenges inherent in the process" Bill concludes.

 

             

 

 

Once you have bids in hand, how do you make an informed decision on who to hire?

1)  Start with a well-conceived and executed “Statement of Work” to avoid misunderstandings by bid candidates. 
     •   Be clear and concise in stating expected deliverables.  

 

2)  Choose companies that have the experience and resources to successfully complete your project. 
     •   Do you understand the scope of your development challenge?  

 

3)  If the bids are far apart (more than 30% variance from low to high), you need to ask the right questions and find out why. 
     •   Will a feasibility phase be required, or can your project be developed with known technologies?
     •   Do each of the contractors really understand the scope of your project? 
     •   Is one of the candidates offering a low bid just to get the business, with no intention of honoring their estimate later? 
     •   Is “product development” the candidate's primary business, or are you soliciting a vendor who expects to recapture development expenses and overhead when they manufacture the product?

 

4)  Understanding the bidding process is the first step toward developing your concept into a robust and manufacturable product that will also meet your cost needs. Opportunity and success are contingent on informed and wise decisions.

 

5)   Read what our Chairman, Rex Bare has to say on the subject.