Chapter 5 of 10 · 10 min read
Price the promise, including the work around it
Test a proposed price against delivery effort, contribution, available capacity and the timing of cash receipts and payments.
A price is a promise expressed in money, but the cost of keeping the promise is often distributed across many small tasks. Preparation, customer questions, checking, revisions and handover can consume as much attention as the visible output. A viable offer must allow for that surrounding work.
The following numbers are fictional planning assumptions for Fieldnote Studio, not recommended market rates. Amounts are in Australian dollars, with GST excluded throughout the simplified example. A real business must include applicable tax payments and receipts in its cash planning and state the tax treatment clearly in customer prices.
Estimate the complete job
Fieldnote considers a A$3,600 package. It estimates 24 hours across input review, drafting, customer discussion, revisions, checking and handover. An internal planning rate of A$85 per hour values that time at A$2,040. The rate is an economic allocation for this example; it is not a statement that every hour creates an immediate cash payment.
| Job allowance | Calculation | Amount |
|---|---|---|
| Team delivery time | 24 hours × A$85 | A$2,040 |
| External review | Estimated project charge | A$250 |
| Project-specific software or materials | Estimated project charge | A$100 |
| Uncertainty allowance | Explicit planning allowance | A$250 |
| Total planning cost | Sum of the allowances | A$2,640 |
| Price | Proposed package fee | A$3,600 |
| Planning contribution | A$3,600 − A$2,640 | A$960 |
Here, planning contribution means the price remaining after these stated job allowances. It is not net profit, a tax calculation or a standard accounting presentation. General overhead, wider sales effort and any costs omitted from the assumptions still need to be covered. Keep the definition beside the number when using it internally.
- Team delivery time, 24 h × A$85
- External review
- Uncertainty allowance
- Software or materials
- Planning contribution
The uncertainty allowance is also not a measured expense. It acknowledges that the estimate may be incomplete. Replace estimates with actual information as the job proceeds, without treating unused allowance as money that has necessarily arrived in the bank.
Record the estimate in enough detail to compare with the actual hours later: the hours for each task, not just the total. When the job is finished, the comparison shows which task was underestimated. A single total that came out 20% over tells the business only that something went wrong; a task list shows whether it was drafting, review or handover, and therefore what to change in the next estimate or the next offer.
Look at the price from the customer’s side
Cost sets the floor below which a price does not work for the business. It does not tell you what the work is worth to the customer. That depends on the alternatives the customer actually has: doing the work internally, hiring another supplier, or living with the problem.
For Harbour Services, the internal alternative is a manager spending several days drafting and chasing approvals while running the business, with no certainty that the result will resolve the inconsistency. Another supplier might charge more or less, with a different scope. Living with the problem means continuing to correct staff explanations and occasionally disappointing customers. Fieldnote does not need to estimate these in dollars, and should not invent figures for them, but discussing them with the customer helps both sides judge whether the package is good value.
A price that the customer sees as fair relative to those alternatives, and that covers Fieldnote’s planning cost with a sensible contribution, is a sound offer. A price that covers cost but exceeds the value of every alternative will not be accepted, however carefully it was calculated. A price far below the alternatives may be accepted readily but leave the business underpaid for work customers value.
Test changes before agreeing to them
At the proposed price, the planning contribution is about 26.7% of revenue: A$960 divided by A$3,600. A A$400 discount reduces revenue to A$3,200. If scope and costs remain unchanged, contribution falls to A$560, or 17.5% of revenue. An 11.1% price reduction has removed about 41.7% of the original contribution.
This does not mean discounts are always wrong. It means the effect belongs in the decision. A smaller scope, lower delivery cost or deliberately funded experiment may justify a different offer. A hope that the customer will be easy to work with is not an equivalent cost reduction.
Now consider five extra hours at the original A$3,600 price. They add A$425 to the planning cost and reduce contribution to A$535. Do not subtract the uncertainty allowance again unless the five hours are a separate addition beyond what that allowance was intended to cover. In this scenario, the extra hours are explicitly additional to every original allowance.
Discuss scope and price together. If the customer needs a lower total, identify which output or service level can change and explain the consequence. Avoid preserving the same promise while silently planning to spend less time on checking.
Price pilots and small jobs deliberately
Small pieces of work, such as the bounded pilot in Chapter 2, are tempting to price low or give away to win the larger job. A modest, deliberate price for a pilot is often sensible, because it tests whether the customer will commit and covers at least part of the effort. A token price, or none, tends to attract interest without commitment and teaches the customer that the work is worth little.
This is an illustration. Fieldnote’s pilot, a review of one service page with a list of inconsistencies and a sample rewrite, is planned at about four hours. Priced at A$450, it does not make a large contribution, but it is a real commitment from the customer, it covers most of Fieldnote’s time at the planning rate, and it produces evidence about how quickly the customer supplies inputs and gives feedback. If the customer proceeds to the full package, Fieldnote can credit some or all of the pilot fee against it, which rewards the commitment rather than discounting the main work.
Whatever the pilot price, write down what it covers and what it does not, as for the full package. A pilot that grows quietly into most of the full job, at the pilot price, is the most common way small offers become unprofitable.
Treat capacity as a separate constraint
A positive contribution does not establish that the work can fit. Suppose Fieldnote has 80 delivery hours available during the relevant period after existing commitments, administration and planned absence. Four packages at 24 hours each would require 96 hours before any overruns. Accepting all four into that period creates a 16-hour shortfall.
Available capacity should be based on usable time, not the number of people multiplied by every hour in the calendar. Consider specialist bottlenecks too. If only one person can perform the final review, the team’s total hours may conceal a review queue.
Possible responses include a later start, staged delivery, a genuinely smaller scope or qualified additional help whose cost and coordination time are included. Overtime may occasionally be chosen, but it should be an explicit limited decision rather than the hidden assumption supporting every offer. Reserve time when the agreed booking conditions are met, and state how long an unconfirmed slot remains available.
Map cash by date
Cash planning answers a different question: can the business meet payments when they fall due? The Australian Government’s cash flow statement guidance supports recording money coming in and going out over a period. Mark forecasts as estimates and use the expected receipt date, not merely the date an invoice will be issued.
For a simplified pre-delivery period, Fieldnote begins with A$1,800 in cash. The proposed payment schedule is a 40% deposit, A$1,440, followed by A$2,160 later under the agreed terms. Assume the deposit is actually received during this period and total business payments during it are A$2,300.
Closing cash = A$1,800 + A$1,440 − A$2,300 = A$940.
If the deposit arrives after those payments, the same period would instead end at negative A$500. The total fee and estimated contribution have not changed; the timing has. An expected receipt cannot pay a bill before it arrives.
| Deposit before payments | Deposit after payments | |
|---|---|---|
| Opening cash | A$1,800 | A$1,800 |
| Deposit received in period | A$1,440 | A$0 |
| Payments due in period | A$2,300 | A$2,300 |
| Closing cash | A$940 | −A$500 |
The A$2,300 payment figure is a separate cash-budget assumption covering payments due in that period, including other business commitments. It is not the A$2,640 economic job estimate converted into cash. Some allocated owner time may not be paid then, some project costs may fall later, and overhead payments may relate to several jobs. This distinction prevents an apparently precise but incorrect reconciliation.
Use payment terms to protect cash
Payment terms are part of the price. A deposit before work begins, a milestone payment at an agreed point and a clear due date for the balance all reduce the time the business carries the cost of the work. They should be agreed before work starts and written into the offer.
State due dates as dates or as a number of days from a defined event, such as delivery of the final draft. Say how invoices will be sent and to whom. Decide in advance what happens if a payment is late, for example pausing further work after a reminder, and say so in the terms rather than improvising after a problem has begun. Most customers pay on time when the terms are clear; the terms exist for the few who do not, and for the misunderstandings that clarity prevents.
Show prices and GST clearly
Customers need to know whether a price includes GST. In this chapter’s example, amounts exclude GST throughout. A business registered for GST would add it to the package fee in its invoice, so the A$3,600 package would be invoiced at A$3,960 including GST. Businesses must register for GST once their turnover reaches the threshold set by the Australian Taxation Office, which is A$75,000 for most businesses at the time of writing; check the ATO’s current guidance for your situation.
Whatever the position, state it in the offer: “All prices exclude GST” or “Prices include GST” leaves no room for dispute. In cash planning, remember that GST collected is not the business’s money; it is owed to the tax office on the business’s reporting cycle and must be set aside.
Make uncertainty actionable
Use a few plausible scenarios rather than an elaborate forecast built on weak assumptions. Consider a delayed customer input, an additional revision round and a late receipt. For each, identify the effect and the action available before the problem occurs. A later delivery slot might resolve an input delay; it will not solve an unaffordable cash gap by itself.
Keep estimates and actuals together after delivery. If revisions repeatedly exceed the allowance, investigate whether scope is unclear, inputs are incomplete or review is fragmented. Raising every price without understanding the cause may hide a process problem.
Check what the job actually earned per hour
After delivery, compare the plan with what happened. One useful summary is the price, less direct external costs, divided by the hours actually spent. This is an illustration using the A$3,600 package with A$350 of external review and materials:
- At the planned 24 hours: (A$3,600 − A$350) ÷ 24 ≈ A$135 per hour
- At 29 hours: ≈ A$112 per hour
- At 34 hours: ≈ A$96 per hour
This figure is not profit, because it ignores overheads and unpaid sales time, but it is a clear signal of whether the estimate held. When several jobs of the same kind drift below the planning rate, the response should start with the cause: more revision rounds than allowed, slow customer inputs, or a task consistently underestimated. Only then should the price or the scope change.
Change prices with notice and reasons
Prices need to change as costs, skills and demand change. Existing customers deserve notice and, where practical, a reason. A short message before the change, stating the new price, when it applies and whether work already agreed keeps its original price, preserves goodwill far better than a surprise on the next invoice.
Changing a price is also a moment to check the offer. If the package regularly needs more hours than planned, a price rise may be the right response, or a clearer scope may be better. Recording why each price was changed builds the evidence for the next decision.
Exercise: evaluate one real offer
Write the price, complete task estimate, relevant external costs and uncertainties for one proposed job. Calculate the contribution using an explicit definition. Then separately place the work into a capacity calendar and place expected receipts and payments into dated periods. Record the weakest assumption in each view.
Proceed only when the economic case, capacity and cash timing are acceptable together. The next chapter turns those decisions into an offer the customer can understand and assess.