This week’s Infrastructure, Rail, and Construction bid news:
Perth & Kinross Council have awarded Balfour Beatty a £35m contract to deliver the first of four phases to the Perth Transport Futures Project. The project aims to ease congestion, improve accessibility and promote economic development. Balfour Beatty will build a newly separated junction on the A9 dual carriageway and a new link road creating access to development land to the west of the city. Works are due to start in September with completion expected in early 2019.
The Alstom Transport (UK), TSO and Costain joint venture has been awarded a £26m contract to build an infrastructure maintenance depot at Plumstead. The depot is scheduled to be operational in August 2018 and was the last of 100 major contracts for the railway to be awarded.
Kier has won a £48m contract to add office space and 2 multi-storey car parks to the ARM campus at Peterhouse Technology Park, Cambridge. The project will see an additional 18,000 m2 of office space, allowing ARM to increase their Cambridge headcount to 3,000.
East Ayrshire Council is seeking a main contractor to build a new Learning and Enterprise campus in the planned development of Knockroon. The project value is estimated at £50m will include the merge of 2 primary schools, further education and business enterprise facilities. Work is currently planned to start in April 2017 for completion by July 2019. Interested contractors can register their interest until 26th September.
Value vs Absorption, a great article written by one of our experts, Peter Bryans.
There are so many pricing theories, strategies, approaches and so on throughout textbooks and the internet. To distil what is simple from what can be overly convoluted and complex – there are only two ways to set a price:
- Value Pricing; or
- Absorption Pricing
Value pricing is linked to the principles of what your customers are prepared to pay, Absorption is linked to the principles of mathematics on recovering the costs to meet your customer’s demand whilst making a profit.
Quite simply value pricing is predicated on what the customer wants to pay (or is believed to want to pay) whilst absorption is what the customer needs to pay so that costs are recovered and the supplier makes money.
Excluding luxury goods, does your customer ever want to pay more than you need them to?
To secure a sale, value pricing will be preferred on the viewpoint that work can only be won if the competition is beaten. On this basis, the price ‘is what it is’ and it is for the business to reverse-engineer profit, risk mitigation, cost recovery and a solution to fit within the set-price. The problem comes when price is too low for a business to work within or if milestone payments govern when and how much is paid; this can lead to problems with cashflow if you are spending money, to service a customer, at a rate greater than you are being paid over time.
To maximise the chances of being able to deliver to time, cost and quality and to yield a profit from a customer Absorption pricing will be preferred. The main problem can be that the calculated price is well above the competition.
Pro’s and Con’s
There are a variety of upsides and downsides to adopting value or absorption pricing:
If a company is small with a low cost-base that is easy to comprehend and manage then value pricing is all that is needed and, indeed, recommended. That said, cash flow should always be considered in parallel.
If a company is larger or has a cost-base that is complex and needs active management then absorption pricing is the sensible approach – provided costs and prices are moderated and scrutinised before being issued to customers.
Value Pricing – in more detail
Value pricing is named on the basis of the value perceived by the customer. We have all been customers and have our own perception of value, therefore the price we are prepared to pay before we’re told what it is – for a product or professional service. If we regularly go to the cinema, we ‘value’ it at £7.50 – £12 a ticket. If we go to a very nice and posh cinema we may increase that value perception to £20. If we went to a brand new cinema and they asked for £475 per ticket – would we accept it, graciously? Maybe we would if we had money to spare and it happened to be the world’s first fully immersive 4D experience. Realistically, we won’t accept such a high price – we would simply leave, go to another cinema, tell our friends and family and never return.
The art with value pricing, therefore, is to understand the market and to set a price that is commensurate with the customer’s perception of value.
Value pricing is orchestrated for new products or services in one of two ways:
- From first principles; or
- Following a critical review of detailed (perhaps absorption) cost and price calculation
First principles are consumer analysis, market research, professional judgment, and historical trends of current similar products/services. Simply speaking with and asking your customer about their value-view is advisable. By analysing a number of opinions and data sources a logical value price can be set.
When a detailed cost and price has been calculated a value price can be adopted as an over-ride. In other words, a total price can be broken down into sub-components and sold at discrete value-prices, to make up the same overall total. As an example, imagine a customer wanting three houses to be built on the same site; one small, one medium and one large. The prices in order to recover costs may not align to a value-view, but can be over-ridden to align and secure the work:
The detailed cost and price is such that there isn’t much difference between small, medium and large as the marginal costs between each is small. However, a value-view would have a much greater difference between the sizes.
If the detailed cost and price approach were to be put forward then the customer would not accept the offer and go elsewhere. This is because the small house would be seen as too expensive. If, however, the value-presentation were put forward then the work would be awarded. The contract values are the same either way. The downside here is that cash flow may be negative for a period and therefore you would hold an additional cost of capital for a duration. This could be added to the price, however.
Client budgets can be problematic in that although the customer may agree that the value of a product or service is above the available budget they simply can’t afford what is on offer. In these scenarios, companies need to think hard about whether they will continue to try to sell to the customer or innovate to supply something of lesser value at a lower cost, provided the customer’s requirements are still met.
If Value pricing is to be adopted and it is expected to lead to low or insufficient levels of cost recovery then a business decision needs to be made as to how the company can lower costs to deliver and make money.
Absorption Pricing – in more detail
Absorption pricing is found more in large organisations bidding for high cost /high-risk work and to tight contractual rules such as firm fixed price (a price that is quoted and does not change for long periods of time, sometimes ten years or more) and engineering & construction contracts such as NEC3 Options A to E.
Subject to whether the customer takes the risk of cost inflation, foreign exchange or delivery risk and what binding contracts may say about punitive charges for late or sub-quality delivery (eg: liquidated damages, service credits, bonds/bank guarantees, etc.) an absorption price model will consist of some or all of the items shown below:
A price is modelled / calculated to absorb all the various elements of cost, risk, and gross margin and is a function of how accurate each component part has been monetised. Each component will be influenced by the quality level of the underlying solution (product, service or project plan) and will change as the solution changes. For absorption pricing professional services, there is an additional consideration termed ‘utilisation‘ – this is an adjustment to account for how much a fee-earning “billable” member of staff could bill to a customer on a time basis versus how much time they actually spend as a cost to the supplier: for example if a member of staff costs the company £100 per day and spends a full 5 day week working for a customer but can only bill 3 days per week then the daily price to the customer would need to recover £100 x 5 / 3 = £167 per day, not £100 per day.
Absorption pricing can descend into a catch-all of as much cost and contingency as can be thought of. Whilst absorption pricing is good at alleviating fears of not making money, giving certainty that risks have sufficient contingency set aside and giving hope of yielding bumper profits, it is weak in that it can form and reinforce prices to be far too high, resulting in losing work. It can also become an entrenched way to over-price again and again if left unchecked; the assumption being that the customer is the silly one and in fact, it is their loss. Preparing models early and analysing them against the Win Price – seeking to lower content to get to or below the Win Price – will mitigate this.
Which to choose?
Both. By undertaking value and absorption pricing in parallel, you can understand how your price is likely to be received by the customer, a ‘dry run’ if you like. You can also comprehend by how much your absorption calculations need to come down by so that the resultant price is the same (or better than) the value price.
Doing both can be hampered by the amount of time available. It is not likely that there will be enough time to look at both a value and an absorption pricing approach. That said, the best idea is to look at both and work to get them to reconcile. A method to do this is to articulate the value price across the “building-blocks” (content) of an absorption price and then track how the detailed absorption price matches each block via gap analysis. Any major differences can be addressed on a case-by-case basis.
For more expert advice and useful information for bid and proposal professionals, take a look at our Bid Hub.
This week’s Construction, Infrastructure and Rail news from the Bid Solutions team:
A £26m contract with the Crossrail project team for a maintenance facility at Plumstead has been awarded to the joint venture between Alstom Transport, TSO and Costain. The proposed maintenance facility will have three railway sidings and have the capacity to stable eight passenger trains on the site.
Vinci Construction UK has won the £35m contract to build and design Cardiff’s student accommodation. The plan is for a 686 bedroom complex at the former Cardiff Metropolitan University Howard Gardens site in the city. Work is due to be completed in 2017 for the new academic year.
The University of Leeds has released a tender for their North East Quarter project. The new £87m development will be constructed to create an international centre for Engineering and Physical Sciences and build on a shared interaction between these disciplines. Work is expected to start spring 2017 with a view to being completed in autumn 2019.
Also this week Aberystwyth University has started looking for a contractor to build a £30m Innovation and Enterprise Campus. The centre will allow research into food, nutrition and energy security, renewable energies and biotechnologies. The client is hoping to award and name the preferred bidder before the end of the year, with the project expected to be completed by May 2019.
The nominations have now closed and the countdown to the 2016 APMP UK conference has begun. The full schedule has been released and there are fantastic speakers covering a range of topics over the course of the event, including some of our partners and subject matter experts.
The conference focuses on many areas this year including how to identify opportunities, influence customers and achieve engagement that secures mutually beneficial business.
You can view the schedule by day below and if you haven’t already, you can book your conference or training day tickets here.
The APMP UK Conference Schedule
This week’s Construction, Infrastructure and Rail news:
Transport for Greater Manchester (TfGM) have opened up prequalification to find a contractor to build a new bus station in Wigan. The £15.7m project is expected to take around 18 months with work starting in June 2017. The project is supported by central government through the Greater Manchester Local Growth Deal Programme and aims to improve facilities for local residents and visitors.
Southern Housing Group (SHG) are investing £631m in the next 4 years to build 3,500 new flats. They are putting together a framework of approved contractors to deliver the various projects and have published a prior information notice (PIN) in the OJEU. SHG are exploring options for best delivering the contractor framework and the survey can be found here.
Abellio East Anglia have been awarded a new 9 year contract to continue running train services between London Liverpool Street and Cambridge, Peterborough and Norwich and includes services to Stansted Airport. The contract runs from October until 2025 and has promised a 10% reduction in average journey times as well as approximately £1.4bn investment in the franchise. Bombardier in Derby will be supplying over 1,000 new carriages to Abellio over the course of the contract.
Perfect Circle have been selected by Scape Group to deliver Professional Services to a variety of public clients. Comprising of Pick Everard, Gleeds and AECOM, Perfect Circle are the first joint venture Scape Group have appointed and are set to deliver £350m worth of services over a 4 year period.
With written communication such a key factor in winning business, how do you ensure you excel at clear and persuasive writing?
Forbes Contributor, Tomas Laurinavicius has shared some helpful tools that aim to improve your powers of persuasion:
Tools That Aid Persuasive Writing
A fantastic writing tool to make your work clearer and easier to read. The app highlights long, complex sentences and common errors and suggests alternatives.
I’m still surprised how many people never heard of Google Docs. It’s a powerful tool that brings your documents to life with smart editing and styling tools to help you quickly format text and paragraphs.
This tool will make you look like a professional writer. It’s a free grammar, spelling and punctuation checker trusted by millions of users.
One of the best ways to let the words out is to ensure a clean and distraction free environment. iA Writer is a plain text editor for Markdown aficionados.
Writing is not easy. To become a writer, you need to write more. Writing Streak is a tool that has been built to help you develop a daily writing habit.
Freewrite helps you to get unstuck, clear your mind and exercise your creativity. Write every day, without stopping to judge or edit. It’s free to use for ten days, after that $4/month.
A compelling headline is a vital aspect of anything you write. This free blog post headline analyzer will score your overall headline quality and rate its ability to result in social shares, increased traffic, and SEO value.
This tool will save you a lot of energy generating engaging titles for your articles. It’s created by SumoMe team and promises to skyrocket conversions.
Do you use any tools to help you check / improve your writing? We’d love to hear your recommendations. Contact us on 020 8158 3952 / email@example.com
The Bid Hub is bursting with the latest industry news, expert advice, events, training courses, salary data, and useful resources.
Whether you are seeking the advice of an expert from our panel of industry leaders or simply looking for a calendar of upcoming events, the Bid Hub is the place to visit. It offers a range of free resources to help you improve your bid and proposal process and knowledge whilst demystifying our often difficult-to-understand profession.
If you would like to submit news, broadcast your training course, market an event or want to offer your services as an expert, please get in touch. Our network of 10,000+ bid and proposal professionals are keen to hear from you.
Visit the Bid Hub now:
Call +44 (0)20 8158 3952
You now have just 1 week left to submit your nominations for the 2016 APMP awards. It is your chance to nominate an organisation / individual who you believe deserves industry wide recognition for the great work they do – you can even nominate yourself!
The award categories are:
- Bid Excellence
- People Development (Sponsored by Bid Solutions)
- Best Newcomer
- Fiona Flower Knowledge Management Award
Voting closes on Monday 15th August. You can find further details and submit your nomination here.
We look forward to hearing the shortlist of nominees which are due to be announced on 5th September.
This week’s Construction, Infrastructure and Rail news:
Mayor of London, Sadiq Khan has signed off on plans for a £175m major housing development in Old Oak, West London. Of the 605 new homes set to be built, 242 will be affordable homes with half being for shared ownership and the other half being split between social and affordable rent. It is expected to take 3 years to complete and work demolishing the existing site will start later this year.
Lakehouse have won a £37m contract with Scottish Power for the installation of domestic smart meters. The 5 year contract will see Lakehouse install more than 450k meters in Northwest England, Wales and Northern Scotland. Lakehouse plan to mobilise and train more than 100 dual fuel engineers this year which will cost around £1.5m.
Suffolk County Council have launched a design competition for 2 new bridges over the river Orwell in Ipswich. The £77m project aims to improve the connection between the waterfront and town centre and ease congestion. The winners will be joining an existing project team led by WSP Parsons Brinckerhoff, who are responsible for providing structural and civil engineering input. The deadline for submission of completed PQQ returns is 1st September 2016 and work is due to start by 2020.
Graham Construction have started work on a new £11m station in Kenilworth, Warwickshire. Design elements from the original station will be incorporated along with more modern facilities for public access Wi-Fi, external ticket machines and cycle facilities. The original station has been closed since 1965 but the new station is part of a wider £88.6m growth project in Coventry and Warwickshire.
This week’s Construction, Infrastructure and Rail news:
Bombardier have revealed the trains that will be servicing the new Elizabeth Line in London. They are set to carry an estimated 1,500 people at the peak of the commuter rush, with 450 of those passengers being seated. The trains are air conditioned and said to be 30% more efficient due to being lighter. The initial stock of trains will have 7 cars before extension works are completed to allow for 9 cars.
Family Mosaic have awarded Keepmoat a £15m contract to deliver 79 new homes in Leytonstone. The new development is scheduled to be completed by summer 2018. Family Mosaic acquired the site from the NHS in 2014 and have committed 30% of the 79 homes to the affordable housing scheme.
Network Rail have awarded Jacobs Engineering Group a contract to continue supporting improvements from Great Western main line to Heathrow Airport. Over the next 27 months Jacobs Engineering Group will be providing design and consultancy services. Proposed plans would see passengers able to travel directly to Heathrow Airport from Reading and Slough rather than having to travel into London Paddington to change.
Wates have won a £33m contract for Construction of a new campus and sports facilities in Whitehaven Cumbria. Planning permission is scheduled to be submitted later this year with a view to starting work in 2017.
Mace cost consultancy have revised earlier forecasts and are now expecting tender prices to fall next year. In April they predicted a 3.5% growth in 2017 however they have now estimated that tender prices will fall 1% next year due to the demand slowing for construction in the wake of referendum result.
Have you noticed a change since the referendum result was announced? We’d like to hear from you, contact us on firstname.lastname@example.org or join the discussion on our LinkedIn group.