# [thelist] Fixed Cost Estimations

Matt Warden mwarden at gmail.com
Thu Jul 21 09:53:06 CDT 2011

```On Thu, Jul 21, 2011 at 9:33 AM, Bob Meetin <bobm at dottedi.biz> wrote:
> I'm still getting a handle on the other thread...  The general problem with
> fixed cost pricing is, as you say, uncertainty.  Most of my clients are very
> very small businesses. They are tight and can only deal with a fixed dollar
> amount.

Sounds to me like you already understand the other thread. What you
are saying here is that your costs don't set prices; your customers'
willingness to pay a particular price for the work sets prices.

The challenge you are describing is just a situation where the
difference between what they are willing to pay and what you estimate
your costs are, is smaller than is comfortable. So, if your estimate
is wrong in the wrong direction, then you will regret taking the
project.

Everyone always has a magic formula for coming up with a project
price. When I worked at one of the big boys, we had a massive
spreadsheet where all you'd have to do is enter in some values of how
many of this and how many of that, and it would spit out a man-hours
estimate by type of resource and then of course give you a dollar
total. Do I need to even tell you how well this worked? In fact, I was
involved in a committee that was working on new estimation methods,
and we were looking at a statistical model that used a person's
estimate as input and adjusted based on past actuals-estimates history
for that person, within a confidence interval. So if history shows Joe
underestimates by 23% with a deviation of +/- 10%, then we would
adjust Joe's estimate for that item by that amount.

But let me underscore. This is us determining what our floor price
would have to be. The price we charge is a very different matter and
is based on what the customer is willing to pay and where we think our
competitors can come in at relative to their ability to execute. In
smaller freelancing/contracting scenarios, you generally are not in as
competitive a situation as when 4 firms with known reputations are
fighting for the same RFP.

--
Matt Warden
http://mattwarden.com

This email proudly and graciously contributes to entropy.
```