Consulting Journal: Bid management - Some budget considerations

Bid management: Some budget considerations

by David Blakey

If you are unfamiliar with your client's methods, you should make sure that you understand the rules.

[Monday 4 November 2002]

You will now be doing one of two things with the budget for the bid.

You may be calculating the budget that you need.
You may be calculating how you will allocate the budget that you have been given.

In some cases, you may do the first and then the second, if your client will not give you the budget that you request.

While you are working with the budget, consider the following.

Internal costs

You should know how your client budgets for internal costs. Some clients have systems for charging the cost of photocopying to individual jobs, while ignoring the costs of employing the person who does the photocopying.

Assume that the salary of the person doing the photocopying is $30,000. Given a 40 hour week and a 45 week year, their time is worth about 28 cents a minute. If it takes them 5 minutes to copy 10 pages, their time is worth about $1.40. A black-and-white photocopier may cost 4 cents a copy, so a company can be charging itself 40 cents for 10 copies while ignoring the $1.40 for the person to do it.

Many organizations do not know what it costs them to employ a person. If that person's salary is $30,000 a year, that figure does not include the cost of the floor space they occupy, the desk they sit at, the desktop computer they use, nor the disk space on the network they consume. It does not include a portion of the cost of the company restaurant, the company car parks, nor the health and life assurance scheme. All of these costs may be ‘bundled’ at corporate level.

You need to know whether you should include these costs in your budget. If you have an employee of the client on your team, their costs may be transparent to you and your bid budget. If you have an external contractor, their costs may be allocated to your budget for the periods when you have them on your team. Other costs may appear. If the client has leased a computer for the contractor to use, then that cost may be taken from your budget, too.

Internal controls

In some organizations, your bid budget will be allocated as a ‘one-off’ by the finance department. In others, your bid budget can come from a pool controlled by the marketing or sales department. The budget may be divided into two. One part of it may be real money that can be spent on preparing the bid, such as paying for travel, for contractors, and for you. The other part of it may be an allocation of internal resources, such as a given number of hours work by a named specialist or engineer, a given amount of time using the company's teleconferencing facility, or a given number of occasions when you can entertain people from the prospect in your client's restaurant or conference room.

In this situation, you should control and document the resource allocation as carefully as you control the actual monetary expenditure.

If you do not have this situation, it is useful to work as if you did. Whenever you use an internal facility that is available for free within the client, you should note the period for which you used it and, if it is appropriate, the number of users. There are two reasons for doing this. First, you will continue to work in a disciplined manner throughout every bid. As in every other area of consulting, you should always work at the highest level you can, so that this becomes your normal way of working. Lowering your level - even for one assignment - can become a bad habit. The second reason is that you may convince your client to adopt a more rigorous attitude to the use of their resources. Ideally, the concept of allocating internal resources can be introduced to clients who do not use it, and this can eventually lead on to a full cost-based allocation of resources to bids - and, indeed, to any project. There should be opportunities for you in consulting assignments to plan and implement these disciplines.

Success rates

For each bid that your client wins, they may have lost four other bids. If each bid costs your client $100,000, then the winning bid must include $500,000 to cover the costs of the bids.

You should note that I am not discussing small bids. If you charge your clients $1,000 a day, then a six week bid will cost your client $30,000 in your fees alone. The bids that need consultant bid managers involve considerable expense.

Sometimes this calculation is masked. Clients do this by setting a maximum budget for all bids within a year and then accounting for this through standard pricing policies. Whether or not the calculation is masked in this way, you should consider the possibility of a cycle of bidding that leads to disaster.

If a client's bids cost an average of $100,000 and it wins one out of five, then its standard prices may allow it to recoup the $500,000. If it begins to lose more bids, then the total cost of bidding for each successful bid will rise. If it has lost seven bids, then the eighth - if successful - should recoup $800,000. Either prices must rise or the cost of each bid must fall. If prices rise, then the client's bids are likely to become less competitive.

It remains a sad fact that many purchasers use a RFP and proposal process when the major differentiator between the competing bids will be price. Tendering would be a more effective process and one that would certainly be cheaper for the bidders and for the purchasers.

If the cost falls, then the quality of each bid will probably fall also. If the quality of the bids falls, then the client is likely to win fewer bids. In either case, the spiral will continue downwards.

It is your task, as a bid manager, to keep costs as low as possible without reducing the quality of the bid. You must also present your bid within a stated time, and, in addition, you must manage risks to the completion of the bid. It is because of the importance of these four classic elements of project management - cost, quality, time and risk - that I view bid management as a project management function instead of as a sales function.

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