Price lists, estimates, quotations and tenders
Every business has to give its customers prices for its products or services. There are several ways you can do this.
Many businesses, such as hairdressers, pubs and restaurants use a standardised price list that remains the same for every customer. Other businesses, such as mechanics, painters and decorators, have to provide tailored prices for the specific products or services a customer wants to buy. This is usually done with an estimate or a quotation. Businesses often price larger, more complicated projects through tender documents drawn up by the customer.
Prepare a price list
Most businesses will need to draw up a price list at some stage. If you sell a fixed range of products, this may be the only form of pricing you need. This type of standard price list can also be used as the basis for pricing your non-standard orders.
Special pricing rules apply to certain types of business including retailers, restaurants, pubs and garages.
The price you give is only an offer - you can't be forced to sell at that price. However, your customers will expect you to honour the prices on your price list.
It's a good idea to date your price lists - particularly if your customer is likely to keep it for a long time. You should make it clear when any special offers expire. It can also be useful to include a clause at the end of the price list stating that prices are subject to change.
If your business sells to consumers, you should list all prices inclusive of VAT. If you sell to other businesses, it is common practice to give prices excluding VAT. However, you should clearly state that this is what you have done.
You should make clear whether any delivery, packing or postage costs are included in your prices. Additionally, although you don't have to indicate discounts for bulk purchases on your price list, it might attract more business.
Clarity is important - the clearer your price list is, the less scope there is for misinterpretation, misunderstanding or confusion.
You may be able to use software packages to help you draw up complex price lists.
Difference between a quotation and an estimate
The difference between a price quotation and an estimate, and when each may be appropriate
Some businesses simply cannot give standard prices for goods and services. This may be because the skills, time and materials required for each job vary depending on different customers' needs.
This situation is common in trades such as building work or producing custom products, where no two jobs are exactly the same. When it's not possible to work from a standard price list, you have to give a quotation or an estimate instead.
The main difference between a quotation and an estimate is that:
- a quotation is an agreed fixed price
- an estimate is approximate price that may change
What is a price quotation?
A quotation is a fixed price offer that can't be changed once accepted by the customer. You must adhere to the quotation price even if you carry out more work than you expected. If you think this is likely to happen, it makes more sense to give an estimate. You can also specify in the quotation precisely what it covers, and situations that will lead to additional charges.
What is a price estimate?
An estimate is an educated guess at what a job may cost. It isn't binding. To account for possible unforeseen developments, you should provide several estimates based on various circumstances, including the worst-case scenario. This will prevent your customer from being surprised by the costs.
How to give a price quotation or estimate
To work out a quote or estimate you need to know your fixed and variable costs. These include the cost-per-hour of manual labour and the cost of the materials you'll need. You can then calculate your quote or estimate based on what you think the job will involve.
You should provide all your quotes and estimates in writing, including a detailed breakdown. This will help to avoid any disputes about what work is included in your overall price. Be sure to state clearly whether it is a quotation or an estimate.
You could also set an expiry date, after which quote or estimate will no longer be valid.
Prepare a written estimate
When you prepare an estimate it's good practice to give the customer a written copy, including a full breakdown of costs.
Your estimate should include the:
- overall price
- breakdown, listing the components of the price
- schedule, detailing when you will do the work or deliver the products
- terms and conditions
- time period the estimate is valid for
- payment terms or schedule
You must include your full business contact details in your estimates. If you have headed paper, it's a good idea to put your estimates on this.
Where applicable you should also include the VAT component of your price.
It is advisable to get signed acceptance of your estimate and to make sure your customer is clear about what you have agreed.
Include a disclaimer stating clearly that the estimate's price is subject to change. Agree in advance how you will cost any variations. These can arise if the client changes their requirements or if a job turns out to be more complicated than expected.
In some cases, businesses supply an initial estimate, then a final quotation once you know the detail of the job.
If you think price complications are likely to arise, it's a good idea to supply a number of estimates based on different scenarios. This will help to avoid any disputes with your client as the work progresses. Make it clear what is included in the estimate, and what is not.
When you start to work or supply, you should keep good records of any cost over-runs, along with how and why they occur.
Software packages can help you identify the costs involved in the work that you're providing an estimate for.
Prepare a written quotation
Quotations commit you to the price you specify, so they are usually used when:
- the work you're quoting for has clear requirements - in terms of time, labour, materials, etc
- your costs are stable
- you're confident the work won't turn out to be more complicated than expected
It's good practice to give your customers a written quotation. This should include the:
- overall price
- breakdown of the components of the price, indicating the price covers and what it does not
- period the quotation is valid for
- schedule for when you will do the work or deliver the products
- full contact details of your business
- payment terms or schedule
- how you will control and price any changes the customer requests once the project is underway
You should get your customer's written confirmation that they're happy with the price you have quoted and the work that this includes. You should do this before you carry out the work, or provide the goods or services.
If the job changes substantially after you start work, it's a good idea to revise your quotation and get it agreed before you finish the job.
Computer software can be used to help you determine the costs involved in any work for which you're drawing up a quotation.
Prepare a price for a tender
If you provide goods or services to other businesses or the public sector, you may have to compete for contracts by submitting a tender. Although value for money can be an important component of many tenders, the way you price your bid can also make the difference between winning or losing business.
Although price is important, there are many other factors that your potential customer may be looking for, from your ability to meet their operational needs to your environmental credentials. The more you can find out in advance about their requirements, the better you can tailor your tender accordingly.
As with quotations, you're committed to the price you submit in a tender if it is accepted.
Before you price a tender, check the instructions in your client's bid specification. These will usually detail how the costs should be displayed so that bids are easier to compare.
You may be asked to provide:
- a breakdown of component costs at each stage of the project - eg weekly or monthly
- staff time and costs
- management time and costs
- administration time and costs
- estimates of reimbursable expenses
Even if a detailed breakdown isn't asked for, it's in your interest to provide one. It can help you to win contracts by showing your client you're offering good value. For more advice on how to price contracts, see win contracts at the right price.
In your tender document, your overall price should be set out in both words and figures. It should be clear which currency you are dealing in and whether your price includes VAT.
You should also state how long your prices will be valid for. It can sometimes take a long time for tender decisions to be made - by which time your costs may have increased.
It is a good idea to add a contingency for any unexpected costs or additional work that may arise. Explain where and why you have included this in your bid.
Win contracts at the right price
Pricing a tender for the first time can be difficult as you will have no benchmark or idea of what competitors might bid.
Price is important when submitting a tender, but don't lose sight of the quality you will provide when deciding on it.
Clients often consider the lifetime cost of the products and services they buy. This includes their initial purchase cost, along with other factors such as maintenance costs, downtime costs (if there's a breakdown) and the cost of consumables and disposal.
Make sure you don't bid too low just to get your foot in the door. Clients will be suspicious of abnormally low bids - they may doubt the level of quality you can deliver for such a price. Remember that once you have committed to a very low price, you may find it difficult to increase your prices with this client in the future.
It is therefore better to price your tender realistically, and ensure that you focus on the benefits that you can provide to a customer. Get this right and many customers will be willing to pay the price required, even if it is slightly higher than your competitors.
Try to think about the value of your goods or services from the customer's point of view, not your own. If you are the only quality provider of something a client really needs, it may be more valuable than you think. Your price should reflect this.