Price and Quality

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Estimation Challenges

There are numerous challenges facing estimators who price up and formulate offers for pending engagements. Some of the issues in putting a solid proposal on the table include resource constraints at the time of estimation commencement, downward pressure on cost when quality is a strong technical requirement, the quality of the data being provided by the customer or their representatives, the numbers of parties involved either on the bid team or on the customer’s side, and taking into consideration aspects of the project you understand from experience that perhaps the competition may not be aware of and results as price impact.

Having good information and advice from vendors and partners goes a long way to being able to explain risks, mitigation of those risks and any impacts on aspects of the offer. Taking a calculated approach towards this ideal, provides a platform of transparency which helps to offset some of the concerns around cutting corners for the sake of price competitiveness. The upside of this for the customer is being able to make an informed choice.

What is our role when Partnering?

As electrical design engineers and automation specialists, we are all too familiar with  the fact that our work package carries a lower overall dollar value when compared to other domains, yet what we deliver has a very high value operational impact. This means sometimes we are “not at the table” until further down the selection process. Idealism aside, this just means the low dollar value items must have sufficient contingency, so these high-risk aspects don’t burn down the house due to negligence.
We see our role on major construction projects is taking away the pain before it starts. In many cases it includes integration with existing operational systems which affect people’s day to day livelihood. Having a voice doesn’t imply significant airtime or over emphasizing the role of technology and technology interfacing via electrical systems, it simply means due diligence. It means speaking up and asking the right questions.

How do we mitigate risk when pricing customers and partners?

Pricing confidence comes from understanding the requirements and being clear about how this is to be delivered to the customer. Good engineering begins with requirements management which is a total project lifecycle activity. How well this is done from the very beginning determines what is provided to the customer to own or to operate.
Being responsible for our aspects of the plan is paramount to being responsible in a world that is highly sensitive and critical of even the smallest of mistakes. Our job is to manage our high criticality items by pricing responsibility accompanied by sufficient information to allow others to make wise decisions.

What do you think about lowest price tendering?

Even though this was indirectly covered previously, the summary is, you get what you ask for. The price is technically determined by the client’s requirements or lack of requirements. If the right money is not on the table to do the job, the client is ill prepared to manage the contractor who likely does that many times over and knows how to exploit the customer. Even though it sounds terrible to say “buyer beware”, a lowest price strategy is a dangerous approach that simply puts the contractor on notice to qualify their offering and subsequently have their own strategy to get paid for the work they do, even though the tender price offered may be insufficient to do the job correctly. It is, “what is not delivered, because it is not written down”, is of greatest concern to customers.

How do you approach tenders which heavily weighted towards lowest price?

Generally, we will not offer proposals that create this conflict for our pricing methodology. We want our customers to be happy years after the initial project and that is not possible if we outsmarted them to win. To us this is not a competition. To us it needs to be a fair exchange.

What helps keep the overall cost down?

Knowing your requirements and being clear about outcomes and how the outcomes are to be measured is a sure way to get the “right” value for money. The “right” value for money is not usually the lowest price, it’s about getting what you have paid for. This is really important to understand. The second most important strategy is to have a project manager who is active and dedicated on your team. They may not need to be full time; however, they must understand requirements management and apply fair and good governance. This will help contractors feel like they are being helped and supported and it will eliminate waste for both parties.

When a system is about to be deployed, it should be tested. Testing before commissioning creates a baseline (reference point) so that development issues don’t creep into commissioning activities. This is particularly important when the customer is paying for all commissioning activities on a rates arrangement.

Finally, transition planning is key to managing small and large technology projects. It is perhaps one of the most important risk reduction strategies to avoid blow outs and excuse making. Transition planning may include workshops, strategy development, consideration for data migration, operational integrity management, configuration management and of course testing.

What drives the price up?

The primary factor that drives up the price for Industrial Automation and Digital Transformation Services and Solutions is poorly defined requirements. Poorly defined requirements are likely to drive the price up if the agreement attached to the scope of works is rigid and inflexible. If the engagement or request documentation has a flavour of “adversarial” management, then this may encourage contingency to be added to the price and is likely to drive estimators to add many exclusions and qualify what is going to be provided. On the flip side, having too many requirements without specifying outcomes means the supplier may easily argue that anything that is not explicitly written down is not included. Unfortunately for end users, it can be challenging to assess good value for money when there are so many factors at play. Perhaps the best guide for value for money is to cross check with other customers. This should provide a good indication about pricing transparency and the companies approach to change management.

How do your rates compare with your competitors?

No matter how you look at it, it is challenging to compare rates between organisations. It is much easier to attribute an hourly rate to an individual and this is more typical for “labour hire” arrangements. Some organisations discount their rates but add more hours to the job because they mainly operate using a labour contracting model, and for extended services the lower rates suites them because they are not taking responsibility for commercial outcomes. This is more typical for arrangements where milestones are not in place. For milestone or outcomes-based work packages, higher rates may be used, using more targeted capability but generally less hours are assigned or costed. The general perception is that the same costs are assigned to the work package, however for any change to the contract, the customer pays a premium. In the case where the supplier/contractor is providing key personnel who are taking responsibility and managing risk, this hourly rate is clearly justified. Bundled in with the core service, they are likely providing better impact assessment and advice along the way.

Is Labour Hire better than Project Services?

Labour hiring engineers into a client’s team has its value. For Parasyn this approach is something we support from time to time to help our clients overcome a shortfall in resourcing or a particular skill. This is never a long-term engagement and is rare. There are a number of reasons we take a short-term approach to labour hiring. Firstly, the collaboration of a team of connected engineers who talk and share ideas every day is a very powerful way to multiply knowledge growth. Isolating an engineer with any one client for an extended period time diminishes not only the engineer’s ability to grow, it diminishes the whole team.

Systems integrators and technology developers are generally on the cutting edge of new technologies. They work on many projects, implementing the latest versions of software, leveraging and using the latest hardware products. End users rely on their suppliers to have up to date knowledge and “bleeding-edge” experience. Being inside an organisation too long on secondment means engineers lose the advantages of working on multiple projects, sharing ideas with their colleagues and the learning and development that comes inside a strong engineering team. Seconding staff may be a simple and fantastic financial model for the contractor, but perhaps not a good strategy for staff retention and personal development. The above principles primarily apply to technology workers developing and implementing software systems.

Do you sell vendor products?

Yes, all the time. Often the price is more competitive than the RRP because we sell more product.

Why is pricing usually cheaper via a partner or reseller?

The cost of selling is high for any organisation. When a partner sells products as an agent for a vendor, they bear the cost of selling. The vendor offers the reseller a discount for that effort. When existing partners are already working with a client doing work, sometimes the cost of selling is less, therefore the vendor is usually willing to sacrifice some margin as good will. This may not be possible if the customer asks for design work and a lot of investigation before a sale is made. This preparatory pre-sale work has to be funded by someone. Its either the client paying for it through doing their own engineering, they are paying someone else to do the preparatory design or they are paying higher margins on the product. Expecting vendors to provide advice doesn’t create an equitable outcome and only encourages margin recovery at some later stage, and this would happen after being locked into a supply decision.

Can you expect to continue to see discounts after a major project supply?

No; don’t plan for this! The overhead costs are amortised across a large project with dedicated resources committed for a period of time. A partner can offer discounts which are attractive on a per event basis but in the greater scheme of things is quite small. It’s all about economies of scale. If you are buying bits and pieces from industry, you set yourself up as an unwanted customer if the customer buyer penny pinches too much. Sometimes suppliers discuss end users and who to be aware of! Don’t be one of them.

What does the perfect customer look like?

Is the customer with an open cheque book ideal? No, because something bad is likely to happen to one or both parties. Also, a customer knowing exactly what they want is not necessarily the ideal customer either. If the customer knows exactly what they want, one has to question why don’t they just do it themselves? The beauty of customers who ask questions and work with suppliers is they demonstrate a willingness to discover and share their thinking about what is important to their organisation. It is this understanding (the business drivers) that should be linked to the work package metric that is used to measure the outcomes. An understanding, fair, enquiring but firm customer is ideal as this helps both parties deliver against their promises. This is a win-win outcome, not a competition.

Model Predictive Control emulates plant operation

 

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