This document is designed to assist in the selection of a tool-kit for product/service costing, budgeting, and pricing (rate setting). It suggests requirements which must be satisfied by a practical, effective approach -- a buyer's checklist.

These requirements address both methods and tools.

Please contact us if you have questions about the meaning of any of these requirements.

Method

• Single, integrated method that does operational planning, budgeting, and rate setting, to ensure that rates add up to the costs quoted in the budget, and to save time (ie, both views of the same data cube).

• Single, consistent method for all groups within the organization.

• Participative method that engages the entire management team, to tap their knowledge, build their understanding, and gain their ownership as empowered entrepreneurs of their lines of business.

• Clear, comprehensive documentation.
  • Step-by-step "cookbook" the explains each step in the process.

  • Clear definitions of critical concepts, and practical guidelines and checklists for each step, including:
    • Clear guidelines and frameworks for determining the lines of business (not always limited to one per manager) to ensure proper product/service definitions and proper amortization of indirect costs.

    • Clear guidelines for determining budget deliverables (products and services) -- ends not means, at the right level of granularity to drive decision-making.

    • Clear definitions of the difference between client deliverables, infrastructure capital, and corporate-good activities.

    • Clear guidelines for the determination of units (price per what), to ensure that rates are understandable, controllable, and measurable.

    • A checklist of the various types of unbillable activities, to be used in the calculation of labor rates.

Budget

• Budget presents the cost of products and services (not just expenses by group).
  • Produces a catalog of products and services as part of the process, with the option to establish service bundles.

  • Costs are aggregated across all members of cross-boundary teams (prime and all subcontractors), with each participating group applying its own unique rates to its share of the work.

  • Level of detail is sufficient to drive purchase decisions, ie, gives clients/executives meaningful control over what they buy, with various summaries to build understanding.

• Budget estimates are linked to volume forecasts, with the ability to forecast growth separately from prior-year's base.

• Budget is based on a plan that includes assured work ("keep the lights on") as well as speculative projects and new services (growth potential at various levels of probability). This describes funding options beyond the base budget, to give clients options and support what-if analyses for portfolio management.

• Provides customers choices (eg, level of service).

• Integrates capital and expense plans (while tracking both types of money).

• Costs are stable without regard to the order in which budget items are debated (eg, without differentiating in advance which projects will require contractors to handle volume growth), and mid-year costing is consistent with budget costing.

• Recognizes fee-for-service revenues as distinct from core budget, either at cost or at other rates, with the differences between fee-for-service revenues and actual costs impacting the core budget.

Price list (rates)

• Calculates the unit costs of purchases, not allocations or charges which are not linked to clients' purchase decisions.

• Units are selected not just to allocate costs, but also to drive economic purchase decisions; they're understandable, controllable, measurable, and related to usage.

• Develops a price list per line of business per manager, with the option for managers to share a common price list.

• Allows managers to specify when to include or exclude direct costs from the rates. Direct costs are excluded from rates when they're billed separately, eg, a rate per hour for people's time and a separate invoice-item for materials such as vendor costs.

• Calculates price with and without subcontractors (total price of the prime contractor and all subcontractors, versus cases where all members of project team charge their work independently to the project), as appropriate.

• Calculates price with and without overhead (with for external clients, and without for internal transfers within the organization and ventures).

Calculations

• Prices are consistent for all: clients, funding sources (core budget, fee-for-service chargebacks), timing (during budget process, mid-year).

• Blended labor cost (the average cost per billable hour of managers, supervisors, full-time staff, part-time staff, contractors, etc.) are applied equitably to all deliverables and rates, to avoid clients attempting to dictate whose work is done with employees versus contractors, and inequities such as different prices for projects that arise mid-year.
  • Use of vendors (job shops for overflow work) offsets projected internal compensation costs and supplies costs, and the price premium is applied equitably to all products/services to avoid clients trying to control which jobs are done in-house versus sent out.

  • Costs reflect caps on headcount, with the ability to model the costs they impose through higher proportions of contractors.

• Properly amortizes indirect (fixed) costs:
  • The cost of "unbillable" time (vacations, leave, training, product research, business development, etc.) for different types of staff (managers, supervisors, administrative support, full-time employees, part-time employees, interns, contractors, etc.) within each line of business under each manager.

  • External indirect expenses from vendors.

  • Internal-indirect costs from groups that serve peers within the organization, transferred to the right place (second-generation service build-ups), not directly to end deliverables (as in activity-based costing, which induces significant distortions).

  • Organizationwide overhead:
    • Overhead may be spread organizationwide (based on headcount or expenses), or throughout specific departments within the organization.

    • Overhead is applied to products and services, but not to investments in infrastructure (ventures) where the organization is "borrowing" money from the corporation for its own use.

  • Costs of supervision (managers) allocated only to subordinate deliverables.

  • Headroom: Sets a price such that growth (with increased use of contractors and vendors) will not cause the organization to lose money, or force it to set different rates for new business that arises during the year.

• Costs of infrastructure (capital investments) and organizational improvements are depreciated, with the "mortgage" built into rates (not the capital itself billed to clients).

• Costs of client deliverables do not include corporate-good activities (such as policy and standards facilitation), which would inflate prices with costs that should be centrally funded and distort comparisons with external competition. Instead, corporate-good activities are budget items in their own right.

• A portion of a batch may be transferred to another group (eg, to a retail store) for resale.

• Process permits multiple departments within a corporation to use the process, recognizing cross-charge among them, with overhead spread at both the department and corporate levels. [corporate module]

• The process is fully transparent, allowing clients to understand the calculations.

• Calculations are consistent with generally accepted accounting principles (GAAP).

• Data may be entered in local currencies, and then automatically converted to a common (reference) currency.

Tools

• Tools that help managers develop the plan.
  • Data input, eg, calculators for billable-time ratios, compensation costs for each type of staff, automatic amortization of indirect costs.

  • Data integrity management, to ensure that all costs are linked to activities without any double counting.

  • Tools to break circularity (groups cross-charging each other) with the minimum in distortions.

• Reports that help management scrutinize costs and identify opportunities to reduce costs.
  • Review of all indirect costs for each line of business under each manager.

  • Staffing management, eg, forecasts of headcount and labor costs for each type of staff (managers, full-time, interns, contractors, etc.) for each line of business under each manager.

  • Product management, with profitability by product/service for each line of business under each manager.

  • Reports may summarize to data for top-level executives within the organization, as well as drill down one or two levels of management.

• Reports that help clients plan their budgets (make purchase decisions) and executives plan the organization's budget.
  • Costs may be broken out by client business unit, at summary or detailed levels.
    • Client business units may form consortia to share products and services. Members decide the percentage of total cost each will pay.

    • Reports may summarize to data for top-level client executives, as well as drill down one or two levels.

  • Summarize by business strategies which comprise numerous projects and services.

  • Summarize by product set (eg, all the products and services related to a specific application, "service towers").

• Feeds to accounting systems (the "plan" in "actual versus plan"), and management metrics such as "profit and loss statements" for each line of business under each manager.
  • Costs may be paid in a specific month, or spread evenly through the year.

Support

• Training for internal project managers.

• Consulting to assist with workshops in the first implementation of the process, if desired.

• Product and method support to answer questions and solve problems.

• Customization to develop special reports and commands if needed.