Bid sensitivity tests: 3 checks on price and cost

Key takeaways

• Record the base price, costs, profit, and margin.
• Test price changes to find your walk-away price.
• Test higher and lower fixed-cost allocations.
• Compare a lower price and higher fixed cost with your minimum profit.

Why test a bid at all

A bid is one number, but it rests on several guesses. You estimate materials, labor hours, the overhead spread across jobs, and the markup on top. Most of those guesses are reasonable. The trouble is that a bid goes out once, and the final result rarely matches the plan exactly.

The idea comes from cost-volume-profit analysis. Price and fixed cost are two of those inputs. They are also the two that often change late in a bid's life, usually without anyone re-running the numbers.

You do not need a complicated model. You need the bid's main numbers, a few what-if changes, and the discipline to write down each result. A spreadsheet helps, but a notepad works too.

Sort the inputs before you test them

Before you start, sort every input into one of three groups. The table shows which test covers each group and where a realistic range can come from.

• Price is what the customer pays. It may be a total, or a base price with markup applied.
• Fixed cost is what you pay whether or not this particular job happens. Equipment payments, insurance, shop rent, vehicle leases, and allocated overhead all belong here.
• Variable cost is what rises with the work itself: materials, subcontractors, and hours on the job.

This post covers the first two groups, because those levers tend to move late in the process. Variable cost matters too, and you can test it with the same method once the other two are in place.

Set up the base case

Start with one clean version of the bid. Write down:

• the price you plan to quote
• the variable costs for the job
• the fixed costs assigned to this job, and how you assigned them
• the resulting profit, in dollars and as a percentage of price

Call this the base case. Every test below changes one thing from it, except the third test, which changes two. Keep the base case on its own line so you can always compare back to it.

Be honest about how you assigned fixed costs. If you spread a yearly shop cost across a set of jobs, write down that assumption. Many bid problems start with a fixed-cost figure that was right last year but no longer fits how much work you are winning. FieldPulse makes a related point in its job-costing material: "Price smarter from the start and validate your results when the work is done." The first half is what sensitivity testing does. The second half depends on the base case being written down clearly.

For a closer look at the profit percentage, see markup and margin mistakes.

Test 1: What happens when the price moves?

The first test changes only the price. Hold every cost steady, move the quoted price up and down by a step you can explain to a customer, and record the profit at each point.

This matters because a markup is rarely a fixed number. Competitor pricing, the customer's budget, and the scope you can trim all push the final figure. Because costs stay put, each extra dollar of price goes straight to profit. Price tests show how thin or thick your margin really is once the costs are set.

Price can also be a strategy, not just a number. In January 2018, McDonald's brought back its $1 value menu. A low headline price brings customers in. The chain also hoped they would spend more, and the source says it hoped consumers "will add higher priced (and higher margin) items to their orders." The approach carries exposure, though. The source notes that the strategy "is not without its risks," because rising food or labor costs could leave franchisees in a tight spot.

The same logic works for a bid. A lower base price can be paired with optional add-ons, such as upgrades or alternates, that carry higher margin. Test whether the base price still clears your minimum without them. Then test whether the add-ons would really be bought. Hoping for them is not the same as pricing them in.

The chapter also has a plain example. An employee surveyed other coffee shops in the area, and the survey found that they are charging $0.75 more for espresso drinks. The owner's next question was what a different price would do to the business. Your bid faces the same question. If the market will bear a little more, what does the extra money do to profit? If the customer will accept only less, how much profit is left?

Steps for test 1:

1. Compute profit at the base price.
2. Raise the price by a small step and compute profit again.
3. Lower the price by the same step and compute profit again.
4. Find the lowest price where profit still meets your minimum. Call that the walk-away price.

It shows how much room you have to negotiate, or to answer a competing bid, without dropping below what the job must earn. If it sits close to the base price, you have little room. If it sits well below, you can compete harder and still protect your margin.

Read the results as a line, not a single point. Plot profit against price, even on a rough sketch, and find where the line crosses your minimum. With costs held steady, each dollar of price change changes profit by a dollar.

Watch for one trap. A price cut often looks harmless because you expect to make it up in volume. That holds only if your crew can handle the extra work and your fixed costs stay where they are. Pair every price test with a quick check on whether the job is realistic for the people and equipment you have. Otherwise you may win work you cannot staff. For that check, see fixed crew capacity.

Test 2: What happens when fixed cost moves?

The second test changes only the fixed cost. Fixed costs do not change with each job, so a bid can look profitable on paper while overhead keeps climbing. Raise and lower the fixed-cost amount assigned to the bid, and watch the profit line.

The same chapter offers a useful case. The owner of Back Door calls the landlord to indicate that she wants to renew her lease for another 5 years. The renewal brings a larger monthly payment, and she is not certain that she can afford an additional $225 per month and tells him she needs to look at her numbers and will call him back. That is a fixed-cost change in real life. Rent is not part of any single sale. It is part of the cost base that every sale must cover.

For a bid, fixed costs usually come in a few forms:

• equipment payments or rentals carried for the length of the job
• insurance, bonding, or permit costs tied to the project
• shop, office, or vehicle overhead allocated by a rate
• long-term commitments, such as a lease, spread across the jobs they support

Each of these can change. Equipment prices move, insurance renewals come in higher, and an overhead rate that worked last year may not fit this year's volume.

Steps for test 2:

1. List the fixed-cost lines the bid carries.
2. For each line, set a reasonable higher estimate and a reasonable lower estimate, using your own history, supplier quotes, or the renewal notice you already have.
3. Recalculate profit with the higher figure, then with the lower one.
4. Note the change in dollars and in margin points.

The comparison is where the value lies. If a modest rise in one fixed-cost line cuts profit hard, the job is sensitive to overhead, and you should check that allocation before you submit. If profit barely moves, that line is not worth much effort, and your time is better spent on price or scope.

Allocation deserves care. Spreading fixed cost across jobs is a choice, and it can change the result. If you assign a larger share of overhead to a bid because the bid is bigger, the answer shifts. If you use more than one allocation method, run both. That is a form of fixed-cost sensitivity too.

Choose the size of each change with care. The higher and lower estimates should reflect a range you could realistically see, not an extreme. If none of the sources above exist for a line, say so in the bid notes, because the test is only as good as the range behind it.

Time matters as well. A fixed cost that looks small on one job can add up across a year, and a long commitment runs for its full term. The lease example is a reminder that how long a commitment lasts matters as much as how big it is.

Test 3: What happens when both move together?

The third test changes price and fixed cost together. Price and fixed cost can change together. A new machine may lower variable cost while raising fixed cost, and you may need to adjust price to cover it. The textbook poses this kind of combined question: what would happen if she purchased the new machine to realize the variable cost savings and also raised her price by just $0.20? That example also changes variable cost; your test below holds variable cost steady.

Steps for test 3:

1. Choose one price change and one fixed-cost change that could plausibly happen together.
2. Compute profit under the combined change.
3. Compare the result with the base case and with the separate results from Tests 1 and 2.

With volume and variable cost held steady, the combined result equals the base profit plus the separate profit changes. If a higher price costs you jobs you would have won, your fixed costs must be covered by fewer jobs, and profit can fall faster than either single test suggests. Check that volume assumption separately.

Run two combined cases. The first is the worst realistic case: a lower price with a higher fixed cost. It shows the floor for the bid, the result if the market pushed price down and an overhead line came in high. If that floor clears your minimum, the bid is sturdy. If it does not, you have three choices: raise the base price, reduce scope, or accept the risk and say so openly.

The second is the best realistic case: a higher price with fixed cost stable or lower. Compare it with the base case to see how much upside you give up by pricing conservatively.

Illustrative example: Compare the changes

Keep variable cost steady throughout so the comparison shows the effect of the price and fixed-cost changes.

Put all three tests in one table

A single table keeps the work easy to read and easy to share with the person who approves the bid. Use these columns: scenario, price, fixed cost, profit, and margin. The example row shows the layout in words.

Use the numbers from your own bid when comparing scenarios. The layout matters more than the particular values. When the rows sit side by side, the pattern is quick to see: which lever moves profit most, and whether the bid holds up under pressure.

Decide what the results mean

The table does not make the decision for you. It gives you a few clear questions to answer. If someone else approves the bid, hand them the table with one sentence on what you would do in the worst case. Decision makers usually want to know what can go wrong and what you will do about it more than they want a precise forecast.

• If profit stays above your minimum at the lower price, you have room to compete.
• If a higher fixed cost pushes profit below your minimum, check the allocation or scope before you submit.
• If the worst combined case fails, raise the base price, trim scope, or flag the risk to the decision maker.

These tests describe risk, not certainty. Your estimate can still be wrong, which is why the record matters. Save the three tests with the bid. When the job closes, compare the actual price and fixed costs with what you assumed. Over several bids you will learn which assumptions tend to be off. Maybe your overhead rate runs consistently low, or equipment costs run high in busy months. Those patterns are the most valuable part of the process, because they improve every bid after this one.

Common mistakes to avoid

Several errors show up again and again in bid reviews.

• Changing more than one lever in Tests 1 and 2. Keep each to one input. Mixing them hides which change caused the result.
• Choosing a step size that does not match your precision. If your fixed-cost estimate is rough, a very small step will look more precise than it is.
• Treating fixed cost as zero because the job is small. Small jobs still carry overhead, and it does not disappear when the job is short.
• Forgetting that a lower price may need more volume. Check crew capacity before relying on extra work to cover fixed costs.
• Running only the best case. An optimistic scenario feels good, but the worst realistic combination is the one that protects the business.
• Skipping the record. A test you do not save cannot improve the next estimate.

A short routine you can repeat

Once the process becomes habit, it takes little extra effort on top of the estimate you were already building. Here is the routine in order.

1. Build the base case and write down the profit and margin.
2. Run the price test up and down, and note the walk-away price.
3. Run the fixed-cost test up and down for each major fixed-cost line.
4. Run the two combined cases, the worst and the best.
5. Compare every result with your minimum acceptable profit.
6. Adjust the bid if a result fails, then submit.
7. After the job closes, record the actual price and fixed-cost outcomes beside your test results.

Today, choose a current bid and record its base case before testing a lower price with a higher fixed cost.

Common questions

What is the walk-away price?

It is the lowest price that still meets your minimum profit with the tested costs held steady.

Should variable cost change in these tests?

Keep variable cost steady for these price and fixed-cost tests. Test it separately using the same method.

Does a profitable worst case guarantee the result?

No, the result still depends on your cost and price assumptions. Compare actual outcomes with your saved tests when the job closes.