How do you make everyone believe that this transformation journey is for betterment?Aug 2, 2019
Don’t be a Procurement Dinosaur!Jun 10, 2019
IoT-Enabled Asset Tracking Is Driving Business InnovationMay 7, 2019
Successful Supply Chain Leader ProfilesFeb 28, 2019
Operations in Year 2022Feb 25, 2019
Transparent Pricing in Contracts: Finding Value in the Details
[image source: Unsplash]
Recently I was asked by a Supplier why my pricing templates are so detailed. They mentioned that when pricing labor for other clients they typically just list a chargeable hourly rate.
Why do I like so much additional transparency?
1. It helps to compare proposals like for like.
For example, you could have 3 companies all appearing to be charging the same amount for a cleaner. On initial face value, you could say to pick any company as they all charge the same rate to you.
However, there are differences....
Company A is paying a living wage rather than a minimum wage. This is likely to help Company A recruit personnel in a competitive market, incentivize and retain them. In lower paid industries, such as janitorial, labour will move jobs for a small amount more.
Company B is investing in benefits to staff and a training budget. Obviously training records and standards should benefit as a result of this and companies should be able to explain what is offered, frequencies etc.
Lastly Company C is charging you the same amount, but their overhead and profit is higher. The first thing I would confirm is that there is nothing grouped in this cell of the pricing file that shouldn’t really be in there. Sometimes I ask a company what costing category is used for a particular element and am told ‘we didn’t know where to put it, so we put in our mark-up’.
This could then result in a reallocation of costs. If their mark-up is genuinely all their overhead and profit it then leads to questions comparing their set up to others’. Ultimately if a company is making a large profit, but paying their staff minimum wage with little or no benefits it certainly would demand a closer look.
2. Is a company complying with the law and best practice and in a way you personally would like to see?
In terms of laws and best practice these are typically country led and can range from statutory benefits, accommodation, visas, transportation etc. To me it is important to understand that a company has allocated the correct and reasonable amounts to meet the needs in this area. For example - there is a big difference between, ‘we include a cost for living accommodation’ and ‘we include a cost for a reasonable standard of living accommodation with regular checks and upkeep and compliant with statutory laws’.
I once did a tender where I audited multiple companies’ living accommodation for their staff; the successful company would maintain facilities services. However, their living accommodation had no health and safety signage, no visible fire protection systems or processes and the staff had no visible lockable areas to keep their own personal belongings. They would get up in the morning to go and perform their shift and someone else (from a night shift) would come and sleep in the same bed they had just vacated.
I’m rewarded by creating savings opportunities but my integrity will never allow me to do this on the back of others being treated this way. Demanding transparency allows you to see exactly what your money is paying for; if it looks too good to be true, it probably is.
3. Are there errors?
The more transparent the pricing the more likely both the tenderer and I am to spot a mistake. Post award due to fairness of tender processes and compliance plus the likelihood that budgets are then fixed it’s not easy to make a change. It is therefore important to make sure you are paying a realistic price for the duration of the service and it is sustainable to the supplier. For a one-off product purchase this might be low risk, but for a service consisting of mainly labour, it’s paramount. In my experience if a company is losing money on a contract it will sadly be the account management or the training that is cut / stretched before the profit, and ultimately the service will suffer as a result.
4. I like detail! In my experience I can learn a lot about a company’s culture - are they willing to be transparent? Do they understand their own costs? Do they understand the requirements of the bid / labour law / their market?
In one recent example I was working with a company that had been known to me for years but as part of a renewal process I asked them to really break out their costs. After a bit of reluctance, they did as asked and not only delivered me a saving through identifying inefficiencies but identified that their previous commercial model used with other clients was actually losing them money. Until they broke it all out they hadn’t realized they were missing some elements!
Transparency not only drives openness and trust, but also ensures that you are truly getting sustainable best value, including ensuring the labor services bought are compliant and fit for purpose.
To what level do you request pricing transparency / detail? If not all the time, what drives a request for it? How do you challenge suppliers who don’t want to share more detail?
Whether engaged in an innovative side project, or working on a complex challenge, Procurement League community members have a problem-solving frame of mind and lots of perspectives to share. Learn from your peers as we showcase practitioners in the top of their fields. Our members provide up-to date and valued insights.Share your knowledge