Transitions in construction

Transitions in construction

Whatever you thought, think again.

Cost-plus pricing has got to go

IndustryPosted by Dan Engström Thu, November 03, 2011 10:42:18
Today, I’d like to look at my point number 10 from below; the pricing of professional services. How many hours did you put in to your latest design? Add marginal to the labour costs you’ve had, send the invoice and move on. I think this cost-plus based logic should be banned as default for consulting designers. Here’s my argument: the client couldn’t care less. Sooner or later, we're in for a hard landing here, good people.Let me elaborate a bit on this. Christian Grönroos is the leading figure in the area of market-oriented management based on service logic in service firms, an area useful for example for making businessmen out of consulting engineers. According to Grönroos, client value equals the quality experienced by the client divided by the sacrifices made by the client. Think about that again. In the numerator of this quota, we find the positive aspects of the project – the quality the client experiences that s/he has received. There are no free lunches, so in the denominator, we find the costs, trouble and strife of getting the quality. Sacrifices include monetary costs as well as the psychological aspects of working with the people involved this project in question. Maximizing this quota is an important driver for our client. But there are often no incentives from a business perspective for the client to maximize quality over an acceptable level (good enough, this will sell), the real effort goes into minimizing the sacrifices. Clients chose reliable partners with low price.

Now, let’s look at the cost drivers of consulting companies. Our business incentive is to sell as many hours as possible. That’s where we get our bonus, that’s why we get the pat on the back, that’s the raison d'être of a designer. To be perfectly honest, the value we create for the client is only an indirect driver – without it we will be hard pressed to find clients that want to work with us. But the direct incentive built into our business model is in direct conflict with the client drivers. In effect, we want to increase the denominator that the client wants to decrease.Cost-based pricing has to go.

If we are to build useful collaboration in this industry of ours, we need to start working on a pricing logic that gives consulting services the same drivers as the clients. I personally think that such logic needs to build on performance from perspectives that the client values: cost savings in production, building performance in maintenance and so on. If we are confident we can decrease energy use in a building after refurbishment, why not build the deal on free design and shared savings over the next five-year period? I am certain that there is a way to write the contract and measure energy use to make this work.

J'accuse. Cost-plus pricing for consulting services has to go.

Image: Asthma Helper, Flickr Creative Commons.