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 evaluation 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 president, Rex Bare has to say on the subject.
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