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Writing a Proposal? How to Properly Account for Costs
Writing a proposal can be stressful; you’ll want to charge enough to make a profit, while still coming in with a bid lower than what your competition is offering. One of the most important steps in this process is properly accounting for costs. How are you going to budget this hypothetical project before you start work on it?
Direct and Indirect Costs
First, understand the difference between direct costs and indirect costs, both of which are going to matter to your budget (and therefore your final bid). Direct costs are the more obvious costs you’ll incur when pursuing this project; for example, they include the cost of labor, materials, consultants, and equipment. If you’re hiring a team of 3 people, each of whom makes $50,000 a year, for a 1-year project, your labor costs would be $150,000.
However, these $150,000 costs are just the beginning. You’ll also be responsible for things like office supplies, computers and digital devices, telecommunications equipment, rent, and legal fees. Too many business owners overlook or underestimate the impact of indirect costs on their final bid. Accordingly, they may come in with a competitive offer, but they could end up losing money on the project.
Key Cost Areas to Consider
Let’s look more specifically at the categories of costs you’ll need to keep in mind for your proposal:
If you’ve worked on a project like this before, you can rely on previous examples to guide your estimates in these areas. How many hours did your team spend on a project of similar scope? How much did you need to travel?
If you don’t have a historical record to base your estimates on, you’ll need to work with your team and try to pin down your best guess in each of these areas. If the scope of the project is unclear, you may need to estimate these costs at a particular range, like plus or minus 15 percent.
Including Your Profit Margin
Of course, once you’re done estimating your expenses, you’ll also need to work in a profit margin when determining how much to charge. Appropriate profit margins vary from industry to industry, so there isn’t a firm standard for what you should charge. This is the most flexible element of your proposal, so it’s one of the biggest factors in determining whether your bid is accepted. Think carefully about the value of the project for your company’s reputation, the level of competition you’ll face when bidding, and how much you want to make from the opportunity.
Estimating costs is one of the most challenging and most important steps of the proposal writing process. If you overestimate your costs, you’ll end up with a ridiculous bid that nobody takes seriously. If you underestimate your costs, you could end up overspending, and reducing your profit margin to practically nothing. Make sure you consider both direct and indirect costs, calculate what you can based on historical data, and estimate conservatively when you’re forced to guess.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.