You Get What You Pay For: Pricing Tactics in the AEC Industry

In any industry, there is a great deal of research and strategy involved in determining product prices. Firms need to consider their target market (and their perceptions on pricing), as well as demand and historical sales and revenue data before setting a price. Depending on the product, this price can be negotiable or set, intentionally high or low, or many other possibilities depending on who the firm is trying to market to. But what about price setting in the AEC industry? We don’t necessarily have a set guidebook to help us determine what we charge our clients for our services, so how are our prices determined?

Types of Pricing and Negotiation in A/E/C

We as AEC marketers understand when we are submitting a proposal that is either qualifications-based or cost-based. Both types of contracts require negotiation and price determination, however when that negotiation happens depends on the type of contract. Let’s take a look at how each negotiation types work and strategies marketers can implement when preparing our proposals.

Qualifications-Based Proposals

In a qualifications-based submittal, price does not come into play until after a contract

has been awarded and negotiations can begin. These types of contracts (typical for public work) call for consultant selection based on qualifications only, prior to beginning a sometimes months-long negotiation period before a contract is signed and work can commence. Depending on the client, we may have a set of “standard billable rates” that are government-approved, that show the maximum billable rate we are allowed to charge for our employees’ time based on job type and level. For other clients, they may provide us with a contract volume limit, and we need to negotiate our price within that amount based on our qualifications. Many AEC marketers may think this means they don’t have to consider pricing strategies during the proposal phase of the project, however that is not necessarily the case. Because of the nature of these negotiations, it is imperative to demonstrate that not only are we the most qualified consultant, but also that we are worth our (often high) prices. When it comes time for contract negotiations, we can leverage this experience to justify charging the full contract volume limit, rather than being negotiated down to a lower price if we are slightly less qualified. However, it is also important to keep in mind that just because we were selected for the contract, negotiations can still fall through and the client can decide to go with a less-qualified firm for a lower price. It is important that we demonstrate our quality leadership when commanding a high price for our services, and this needs to be clearly communicated through our proposal and reinforced regularly through the work we complete on the contract. When a project goes badly, and perhaps one of our references relayed that information to our prospective client, our ability to negotiate a higher price is weakened and we may be forced to work for a lower contract value for the contract term until we can rebuild our quality leadership reputation.

Cost-Based Proposals

Cost-based proposals and contracts are far more common in construction and private work, and while our qualifications and experience are still of great value and importance to demonstrate, many times the client is basing their decision solely on the price we provide for them in our submittal. With these types of contracts, there isn’t necessarily a negotiation period, rather, marketing needs to work closely with the project manager, leadership, and the estimating and finance departments to determine what our most competitive price will be for this particular project and client. In these instances, a large part of our strategy needs to involve an in-depth SWOT analysis and a great understanding of who our competitors are and what prices they have historically won projects with. For example, let’s say we recently lost a string of projects to Competitor X, who repeatedly underbid us by $1 million simply because they were charging less for employees’ time. We know that our billable hour markups are an industry high, and while we are comfortable that our quality of work justifies this markup, we need to adjust our pricing strategy to be more competitive. Working with estimating and leadership, we need to determine what we think our competitors will bid the project at, at what rate are we comfortable reducing our own prices, and discuss our confidence levels that even if we are still bidding higher than Competitor X, if the client will select us at our lowered rates. However, this can be a slippery slope and should be done carefully – one could argue this is essentially “cheapening” our work and we may have a harder time winning work with this client again at our elevated rates.

Marketing in the AEC industry is niche in many ways, and pricing strategies are no exception. Pricing is an evolving factor that will be different for every client and every project, and we as marketers need to strive to represent our firms’ experience and pricing in the best way possible, while staying in tune with market trends and our competitors.