Gone are the days when important commercial contracts were agreed upon on the “back on an envelope”. The genesis of the spreadsheet has ushered in a more robust, accountable and best practice approach to the modelling of commercial contracts.
A well-structured pricing model can assist a company to gain a better understanding of anticipated financial returns from servicing a new contract, service or project; based on a specified price and the incremental allocation of all indirect costs.
There are a number of basic and straight-forward steps that can be implemented at the commencement of a contract model build, which will help alleviate and avoid painful and time consuming errors or oversights.
As discussed in Article 1, on the surface costing a service contract may seem straight forward; however there are a number of factors to consider. Your Company needs to understand the importance of full-costing versus incremental costing of a new service contract.