Question

You have been asked to price out a project for a customer based on a firm-fixed price. Table below shows the numbers that you arrived at in determining the bid amount for the project that should be submitted.

As you know, before a bid is submitted to a potential customer, the bid must be reviewed by a committee of senior managers that can question the validity of the numbers as well as look for “hidden” costs that may have been omitted. For each of the situation below, revise your table and re-calculate the final price to be submitted to the customer.

1. Management tells you that during the execution of the project, the customer will want three interface meetings with the customer held at the customer’s location. The Travel Group within your company informs you that airfare, ground travel, meals, and lodging are expected to be approximately $1,500 per meeting.
2. The Travel Group has also issued a Covid-19 (Corona Virus) safety kit for $1,800 that must be carried on every trip.
3. One of the executive comments, “The shipping costs for the deliverables, including insurance, packaging, and handling will be about $800. I do not see this included in your summary.”
4. The RPF for the project stated that the contract would be firm-fixed price with a lump-sum payment at the end of the project after approval/acceptance of the final deliverables. The cost of capital is expected to be approximately $6,000.
5. The executives believe that a management reserve of 10% should be included in the summary costs.

State your assumptions, if any, and complete the Revised Amount column accounting for all the amounts.

Item #	Category	Type of cost	Original Amount	Revised Amount
1	Direct Labor	Engineering	$88,200
		Manufacturing	$52,500
2	Indirect Labor	Subcontractors	$10,000
		Consultants	$2,000
3		Total Labor	$152,700
4	Corporate G&A	10% of Total Labor	$15,270
		Total Cost	$167,970
	Target Profit	20% of Total Cost	$33,594
		Bid Amount	$201,564

Answer 1

Item #	Category	Type of Cost	Original Amount	Revised Amount
1	Direct Labor	Engineering	$88,200.00	$88,200.00
		Manufacturing	$52,500.00	$52,500.00
2	Indirect Labor Cost	Subcontractors	$10,000.00	$10,000.00
		Consultants	$2,000.00	$2,000.00
3		Total Labor Cost	$152,700.00	$152,700.00
4	Corporate G&A	10% of Total Labor	$15,270.00	$15,270.00
5	Shipping Cost	Insurance, Packaging and handling	$0.00	$800.00
6	Capital Cost		$0.00	$6,000.00
		Total Cost	$167,970.00	$174,770.00
7	Profit	Target profit is 20% of total cost	$33,594.00	$34,954.00
8	Summary Cost	Management for 10% of total cost	$0.00	$17,477.00
9	Travel	Airfare, ground travel, meals and lodging	$0.00	$4,500.00
		Covid-19 Safety Kit	$0.00	$5,400.00
		Bid Amount	$201,564.00	$227,201.00

5. For shipping cost, $800 for total deliverables (as will be included in profit.

6. Capital cost of $6000 (as will be included in profit)

7. Profit will be calculated on the total cost accountable for providing the service to the company. Hence it will include direct and indirect labor, shipping and capital cost.

8. Summary profit is 10% of the total cost. (as the management will have this, the profit wont be added to this)

9. For travel, we have to include $1500 per trip for 3 trips (total $4500). Also the covid-19 kit is $1800 per trip for 3 trips (total $5400). Travel cost is for the employees, hence wont be counted in profit. Hence this will be added after calculating the profit.

Profit cost includes only the cost that will be utilized in the whole process. Hence the profit includes Direct and indirect labor, shipping cost, Corporate G&A, capital cost only. The travel cost, and summary cost is utilized on the employees and hence don’t participate in the profit part.

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