What is scope or scope of work?
In business, we’re not talking about Scope Mouthwash; scope or scope of work often has to do with project management. It is the combined objectives and requirements needed to complete a project. The scope of any business involves all of the activities performed by that business. Scope includes sales, services, contracts, product developments, and marketing. It is a term used to describe all daily operations of the business and particularly the activities that are required to secure revenue.
How do I calculate the price of my scope of work?
When pricing a service or project, you need to determine what it costs you to complete the project. You will add together your total costs and multiply it by your desired profit margin percentage. That amount is added to your cost. It is important, before offering your scope, to calculate three prices:
- Cost of Raw Materials
- Labor Costs
- Overhead Expenses
Now you have your data and raw numbers, how do you price your scope so that your project makes a profit? Here are some strategies for your scope.
Pricing Strategies for Your Scope of Work:
Most businesses have industry-specific ratios of cost to profit and more ways to arrive at pricing. These simple strategies could be helpful when trying to calculate your fee schedule. The best approach will be based on your individual business conditions:
Break Even Price:
Cost of Raw Materials + Labor Costs + Overhead Expenses
Number of products
Profit-Based Price (Wholesale Price):
Cost of Raw Materials + Labor Costs + Overhead Expenses + Desired Profit
Number of products
Cost of Raw Materials + Labor Costs + Overhead Expenses + (Profit x 2)
Keystone Price (Doubling Cost for Retail Price):
Retail Price = [(Cost of Item) / (100- Markup Percentage)] x 100
Break Even Price x 2 – Ideal Profit Margin Within Competitor’s Price = Wholesale Price
Other Pricing Methods:
Cost of Raw Materials + Labor Costs + Overhead Expenses + Profit = Wholesale x 2 = Retail
Salary X 3
Hourly Overhead Expense + Hourly Wage + Profit = Total Price Per Hour
It’s important to make sure you calculate your overhead rate correctly.
Overhead Rate can be Calculated by:
Overhead (Indirect) Costs (i.e., Rent and Utilities)
Direct Costs (i.e., Labor)
When using these pricing strategies, you can ensure your costs and profit are covered. Would you want to reduce this because a potential client cannot pay this amount? Probably not. Your service or product have a value and lowering your price to accommodate a client who cannot pay will devalue your service and it won’t help you stay in business.
Reduce the Scope, Not the Price:
It is important to reduce the scope of the work to be performed rather than reduce the price randomly to fit the needs of the client. Here are some ideas to reduce your scope instead of the price:
- Reduce the project: Take a look at what parts of the project you can reduce.
- What will reduce hours, or the number of products provided.
- Work to reduce project uncertainty:
- Make certain you know the cost
- Make certain you can deliver the promised project.
- Don’t be afraid to say no.
The concept is to stay true to your costs and anticipated profit. If the potential client cannot pay this amount, you’ll need to decide if the client is worth pursuing. After all, you don’t want to give away your work and lose money doing the work.
What is Scope Creep?
“Scope Creep” can be responsible for losing money on your project, even when you have agreed to a price and scope. In our next blog, we will discuss scope creep and how to prevent it from taking over your project management.
For additional resources on how to reduce scope, not price for your small business and project management, or if you would like help with other business strategies, please contact us at the Small Business Development Center – SBDC – serving Collin and Rockwall Counties, Texas.
Blog by: Marta Gomez-Frey