To size a material price rise on a bid, multiply the unit increase by the units the bid still depends on. Then compare that total with the margin left on the line. The question is not how large the change looks on one unit. The question is how many units are still exposed, and how much margin is left to take the hit.
Key takeaways
- Before comparing anything, multiply the increase on each unit by the number of units the bid still depends on.
- Under your stock valuation method, units already bought carry the cost assigned to them, so a supplier's new price reaches only the units you still have to buy.
- Only a change on each unit gets multiplied by units; a fixed change is added once to the bid's total cost instead, which reduces the margin.
- If the increase exceeds the contribution margin priced on one unit, that unit contributes less than nothing.
A textbook case makes the point well. OpenStax's break-even sensitivity section follows a small business whose owner receives a letter from her cups supplier in March. The letter reports a $0.05 price increase because of higher material prices. She is surprised that such a small increase in variable costs would reduce her net income by $75. The case is about planning, not bidding, but the arithmetic is the same one an estimator needs when a material price moves on a line that is already priced. The source is here.
This post works through that arithmetic in five steps. The first three steps size the change in dollars: the increase on each unit, the number of units the bid still covers, and the margin left on each unit. Steps four and five cover what to do with the number and how to keep a record that makes the next notice faster to handle.
Step 1: Confirm the change applies to each unit and which items it touches
Start with the supplier's notice, not with your spreadsheet. Note the item identifier, the old unit price, the new unit price, and the date the new price takes effect. Write them down in the unit of measure your bid uses.
Unit mismatches cause more trouble than they should. If the notice quotes a price for each box and your takeoff counts single pieces, the $0.05 cannot be dropped straight into the bid. Convert the price to your unit first. Otherwise you will size the wrong change and feel confident about it.
Keep the notice itself in the bid file. An email summary is not the notice, and when a customer asks where a number came from, the original letter is the answer you want to give.
Next, match the notice to the exact line items. Suppliers often issue a notice that covers a whole product family, but an increase on one size, grade or finish does not reach a line you priced with a different one. Go through the bid line by line and mark each line that uses the item. Lines you cannot match to the notice should be set aside with a note saying why, rather than quietly assumed to be unchanged.
Then decide whether the increase applies to each unit at all. The Back Door case is clean because the change sits in a variable cost. OpenStax states the logic directly: because the increase in the cost of the cups was a variable cost, the impact on net income can be seen by taking the increase in cost for each unit, $0.05, and multiplying it by the units expected to be sold.
A variable cost moves with volume. Many other costs do not. A flat delivery charge, a setup fee or a rental fee changes as one lump, so its change does not multiply by units. Sort each part of the notice into one of two groups before you do any arithmetic: a change on each unit that you can multiply, or a fixed change you add once.
Watch for a change stated as a percentage of the old price. A percentage is not a fixed $0.05 on each unit. Work out the new unit price from the percentage, then find the difference from the old price. That difference is your increase on each unit, and it may not be the same across every item on the same notice.
If the notice does not say whether a charge applies to each unit or is fixed, ask. The answer decides whether the charge is multiplied by your unit count or added once. Guessing wrong can misstate the change badly, because a charge on each unit repeats across every unit the bid covers.
Check the timing too. A notice that takes effect before your materials are bought affects different units than one that takes effect after. The bid's delivery schedule and your purchasing plan tell you which units the new price will reach. Note the date in your record, because step five depends on it.
A simple test helps. Read the notice as one sentence: the price of this item goes from one unit price to another, starting on a stated date. If you cannot finish that sentence with a single unit price, the notice is not ready to size. Ask the supplier to confirm the missing detail in writing before you change the bid. A bid changed on a half-read notice is harder to defend than a bid that waited one more day.
Step 2: Count the units the bid still depends on
The second figure is the unit count, and most sizing errors hide here. Start with the quantity for the affected line in your bid takeoff. Do not use the total job size from memory, and do not use the number you hoped the job would be. In the Back Door example, the count is 1,500 units expected to be sold, and the change is the increase on each unit times that count. A bid works the same way: the count is the units of that material the bid needs.
Units and lines are different things. A line item is a row in the bid. A unit is one piece of the material. A single line can cover many units, and the increase multiplies across all of them, so a line that looks small on the page can carry most of the change. Sort the lines by their unit count before you decide where to focus.
Then separate what you have already bought from what you have not. OpenStax's inventory example shows how stock on hand is recorded. At the beginning of February, the business had 50 units in inventory at a total cost of $350, which is 50 × $7. The inventory example is here. Depending on your stock valuation method, those units carry the cost assigned to them. A supplier's new price reaches the units you still have to buy, not the units already sitting in your yard or on your shelf.
For a bid, that means the count is not simply the job quantity. It is the job quantity minus what you already hold at the old cost, if your records value stock that way.
Check how your records value stock before you rely on this. Different valuation methods assign cost to units in different ways, and the answer changes with the method. If the valuation is unclear, ask whoever keeps your books how the cost of stock on hand flows into job costs. Do not guess, because a guess here moves the count in one direction or the other. For how unit costs are built up, see weighted average unit cost.
Count allowances as well. If your estimate includes extra material for cutting, waste or a spare, those extra units are bought too, so they belong in the count. Leaving them out understates the change.
Loss in production works the same way in stock records. ERPNext's documentation on stock entries explains that "The process loss cost of 20 quantities has been added to the 80 quantities of FG Item." (Frappe Documentation, Frappe Documentation) The cost of what was lost is carried by the good output. The same page puts the recording step this way: "So here 20 quantity has been produced so therefore the system has marked it as Process Loss Qty." Keep your own allowance on a separate line in the working, in the same spirit, so you can see its share of the total.
Count by line, not by job. A bid can use the same material on several lines, and the notice may touch only some of them. Counting by line shows which lines carry the change, and it keeps the total from hiding one line that now costs more than it earns.
A bid is also a forecast, and a job is what happens. If the scope shrinks, the change shrinks with it. If the scope grows, the change grows. Tie the count to the scope in the bid as sent, and note any scope change in your record the day it happens. Write each count down with its source: the takeoff sheet, the revision number or the page in the bid. A count you can trace is one you can defend when the customer asks why the price moved.
Step 3: Multiply, then compare the total with the margin left on the bid
The third figure is the margin left on each unit. Contribution margin is what each unit contributes after its variable costs. That amount pays the fixed costs and leaves profit. Multiply that margin by the units covered to get the total margin the bid has left.
OpenStax carries the Back Door change through that line. Because the cups are a variable cost, the $0.05 increase on each unit multiplies by the 1,500 units expected to be sold, which shows a decrease of $75 in contribution margin. The break-even example is here. The same $75 is the decrease in net income.
The arithmetic for your bid is short. The dollar change equals the increase on each unit times the units the bid still covers. Then compare that dollar change with the total margin the bid has left on those units. If the change is smaller than that margin, the bid still earns its planned margin, with less room. If it is larger, the bid now earns less than you priced it to earn, even if every other cost stays the same.
The change is linear in the unit count, so the sensitivity is easy to read. Each unit adds the same increase. A bid that covers twice as many units takes twice the dollar change, and a bid that covers half as many takes half. That is why a small number on each unit can matter. The $0.05 looks trivial on its own, but repeated across 1,500 units it is $75. For more checks of this kind, see bid sensitivity tests.
The figures from the example line up as follows.
Read the table as a chain. The $0.05 is the first figure, the 1,500 units is the second, and the $75 is what those two produce together. The third figure, the margin on each unit multiplied by the units covered, gives the total margin, and that total decides whether the $75 fits inside the bid. The bid's own margin on each unit must supply that figure.
There is one more check on the margin on each unit. If the increase is larger than the contribution margin you priced on one unit, that unit now contributes less than nothing. Multiply that loss across the units and the bid goes negative on that line. This is the quickest test to run on a tightly priced bid, because it needs no unit count at all.
Keep fixed costs out of this comparison. The OpenStax example changes only a variable cost, so the change in net income equals the change in contribution margin. If the notice also raised a fixed charge, add that charge once to the bid's total cost rather than on each unit, so it reduces the margin once.
Write the answer as two numbers: a dollar figure and a percentage of the bid's expected profit. The dollar figure says how much money is at stake. The percentage says how much of the cushion is gone. Both matter to an owner deciding whether to hold the price, and both are easy to produce once steps one and two are done.
Illustrative example: a 200-unit bid
A bid covers 200 units, and the notice raises the price on each unit by $0.05. The change is 200 × $0.05 = $10. The bid leaves a margin of $4 on each unit, so the total margin left on those units is 200 × $4 = $800. The $10 change fits inside the $800, so the bid still earns its planned margin, with less room.
Step 4: Decide how to respond before the bid goes out or the work starts
With a dollar figure in hand, there are three basic responses. You can absorb the change, reprice the line, or recover the cost through a pricing rule such as a surcharge. Which one fits depends on whether the bid is still open, whether the customer has accepted it, and how much margin the dollar change consumes.
Absorbing is reasonable when the change is small against the margin left and the bid is still open. It is a decision, though, not a default. Record it, and make sure the owner knows the bid now earns less. An owner who sees the number can decide to absorb it on purpose. An owner who finds out later cannot.
Repricing is the direct fix for an open bid. Update the material line with the new price for each unit and the same unit count, then recalculate the total and check it against your target margin. Send the revised figure with the notice that caused it, so the customer can see why the number moved.
Timing matters for every option. A reprice sent before a customer signs is a different conversation from one sent after the work has started. Decide early, and say so in the revised figure.
Word the explanation in the supplier's terms. Name the notice, the item, the old and new unit price, and the units affected. Avoid general phrases such as rising costs across the board. A customer can check a specific notice against their own records. A general claim invites an argument about whether the number is fair, and that argument helps neither side.
Recovering through a surcharge is the third route. ServiceTitan's help page on dynamic pricing gives examples of how a rule can add a cost. One adds a 3% surcharge to cover small extra costs like protective equipment or disposable materials such as gloves and shoe covers. Another adds a $50 flat surcharge to cover fuel expenses. The pricing rule page is here. Those are the page's examples of how such a rule can be set up, not a standard for your trade. They are useful because they show the design choice clearly.
The design choice is between a percentage and a flat amount. A percentage moves with the size of the job, so a large job carries more surcharge than a small one. A flat amount does not move with size at all. A material increase on each unit matches a unit-based adder most directly. Whichever form you pick, choose the one that matches the cost you are recovering. Then check the result against the dollar change from step three. A surcharge that does not cover that change has not recovered the increase.
Accepted bids need more care. If the customer has signed, the terms you signed set what you can change, and a new price usually needs the customer's agreement. Put any proposed change in writing before the work proceeds, with the notice, the units and the dollar figure attached. Do not begin revised work on a verbal agreement, because a verbal change is the hardest one to prove later.
Talk to the owner before the response is chosen. The owner has the view of the whole book: other bids, the cash position, and the relationship with the customer. Give the owner the three figures and the options, and let the owner choose. The owner carries the risk, so the owner should make the call with the numbers in front of them.
Step 5: Record the figures and recheck when the next notice arrives
Keep a short record for each notice. Include the item, the notice date, the old and new unit prices, the effective date, the units used, the dollar change, the margin left, the response chosen, and who made the decision. Each field answers a question someone will ask later. A record with gaps forces you to rebuild the working from memory.
The record matters most for the next notice. Suppliers often send another change within the same season, and a record lets you rerun steps one through four in minutes instead of starting over. It also shows the customer, or your owner, how each price moved and why the bid changed.
Set a threshold in advance. Decide what size of dollar change, measured against the margin left, sends a notice to the owner before any reply goes to the customer. A threshold written down before the notice arrives keeps the decision steady when a notice comes in late on a busy day, and it spares you from arguing the question again each time.
At the end of each season, review the records. Look at which bids absorbed a change and how the margin actually came out once the work was delivered. Compare those results with what the sizing predicted. If the predictions were consistently low, the unit counts or the allowances probably need more care. If they were consistently high, the threshold may be set too cautiously. Adjust the method from what the records show, not from a feeling about the last notice.
Recheck the bid at two points. First, before the bid is sent or the price is used, confirm that the unit count and the figure for each unit match the current notice. Second, when the scope changes, recalculate, because a change in quantity changes the second figure and therefore the dollar change. A bid that was right at the old scope may be wrong at the new one.
When another notice arrives on the same material, repeat steps one through four with the new figures. Do not stack it onto the earlier figure from memory. Use the notice's own numbers each time, and check that the old and new prices in your record match what the supplier stated.
The three figures do most of the work: the increase on each unit, the units the bid still depends on, and the margin left on each unit. Multiply the first two, compare the result with the total margin left on the bid, and then choose a response you can explain. The Back Door example shows how small a change on each unit can look before it is multiplied, and how much it becomes after. Used that way, a few cents on a supplier's notice becomes a dollar figure an owner can act on.
Next step you can take today
Pull the supplier's notice for one bid, list each line that uses the item, and count the units on each line.
Frequently asked questions
Does a unit price rise always cut the bid's margin?
A unit price rise reduces the margin only on the units you still have to buy at the new price, and the reduction equals the increase times that count.
Is a fixed fee multiplied by the unit count?
No, a fixed charge is added once to the bid's total cost, as step one explains.
What if the notice gives a percentage?
Work out the new unit price from the percentage, then take the difference from the old price to get the increase on each unit.