The 5 ‘C’s for Understanding True Project Cost and How to Price Professional Services

By Mark E. Engelberg, TimeLinx Software, Inc. –  

One of the murkiest and most challenging factors to clarify in professional services is establishing true-cost-to-service (a part of job costing). Without accurately understanding every factor that affects how much to quote based on margin and how to have a strategy in advance to approach price negotiation, things can quickly become a finger-in-the-air exercise. 
Beyond cost-to-service, professional service management teams must pin down a host of slippery factors for efficient pricing, negotiating, and quoting for professional service projects. 
However, let’s first address true-cost-to-service as the one factor professional service organizations can independently master and get a firm grip on. 

‘C’ Is for ‘Cost-to-Service’ 
Understanding the actual cost of delivering professional services projects is inherent to maintaining accurate margins and your best alternative to a negotiated agreement (BATNA). BATNA is your price reservation point or the lowest price you are willing to accept. 
Tracking hard-to-track costs 
Here’s the kicker about calculating cost-to-service. You might not have all the correct figures. In professional services, obtaining the right billable data relies on that data being consciously captured by countless field team members.  Or software. 
For starters, the importance of time-tracking as a key true-cost-to-service variable can be reduced by lack of oversight, data keying errors, and reliance on manual processes. 
Even before things like event logging and time tracking of billable hours become an issue during the project delivery phase, pre-sales costs-to-service factors often slip the net and escape even being recognized as a “pre-sales” billable cost. 
Fortunately, there are repeatable approaches for determining labor costs and expenses before spec’ing and quoting for professional service projects. 
For example, TimeLinx’s Project and Service Management platform includes Pre-Sales Labor Tracking capabilities. That means, whether you win the deal or not, all the costs of time spent to create the quote itself or to determine projected costs for the quotation can be accounted for, giving you a choice as to whether to ultimately include or not include that time in your invoicing. 
‘C’ Is for ‘Competition’ 
Professional services and field service providers with contractual exclusivity to certain vendors or sole-sourced projects enjoy the luxury of quoting client projects with limited or no scrutiny. 
At the other extreme, in a competitive landscape unsecured by such exclusivity, circumstances around project pricing are prone to being quite variable for multiple reasons, including being pitched against other firms. 
‘C’ Is for ‘Client Connection’ 
In the case of existing clients, higher fees may be justified by a client relationship where the value of the work is enriched with a familiarity of the work to be delivered. In other words, you already know the client’s business, or the industry, and can confer more project value. But the converse thinking would lead toward providing a loyalty discount, though this can be dangerous in the long term by creating precedence for ongoing discounts. 
In the latter case, when pitching to new clients, the temptation may be to raise pricing ‘competitively.’ Pitching suspiciously low raises other concerns (‘do they desperately need the business?), so prospects may get wary — typically, the lowest price pitched won’t win the work. Clients are willing to pay for value, though it must be proven. 
‘C’ Is for ‘Client Value’ 
Another factor, besides competition, that will have a material impact on how much you’re able to charge for projects is the relative price sensitivity of the customer. 
The level of importance placed on projects pitched in the context of solving business challenges and how urgent those challenges are will dictate where they set the bar of value. 
‘C’ Is for ‘Capacity’ 
Businesses with high fixed costs—think airlines and hotels, for example—often use price as a key lever to optimize capacity utilization. 
Professional and field service providers with similarly large-scale salaries, rent and insurance costs can take inspiration from their corporate counterparts. 
Going back to ‘C’ is for ‘Client Connection’; offering even the most loyal customers discounts when your field service teams are doing overtime-hour shifts isn’t the smartest of moves—particularly if some of those person-hours aren’t even time-tracked but instead lost to oversight and human error. 
Ultimately, professional services and field services do themselves a disservice when utilization time doesn’t translate to real-time costs and therefore, project pricing. That’s why enabling smarter ways of tracking billable time should be implemented and, once validated, are non-negotiable.   

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About TimeLinx
TimeLinx delivers innovative project & service management software as a complete solution that perfects the sell-track-manage-support-bill cycle that services organizations must have to delight their customers; TimeLinx brings the cycle together in a single application that offers less frustration, better project management, complete reporting, and improved profitability – all specially designed for Infor and Sage.