Profit and risk evaluation in customer driven engineering and manufacturing

In engineer-to-order production situations quotation prices of customer driven engineering and manufacturing projects are normally determined by calculating a full cost price. In this article we shall argue that the use of a full cost price does not appear to be worthwhile in view of the specific characteristics of this type of production situation. Furthermore we propose an alternative way of determining and evaluating quotation prices. Instead of calculating a full cost price we suggest to evaluate the profit margin and risk level of these kind of projects. The price level of a potential order can be reviewed by evaluating the potential (gross) contribution to profit of the potential order as soon as this price level is known. The potential (gross) contribution to profit is calculated by subtracting the direct allocatable costs of the potential order from the price level dictated by the market. This potential contribution to profit can be expressed as a percentage of the price level (potential profit margin). The price level is evaluated by comparing the potential margin to a target margin. This target margin has been established based upon the company business strategy using a risk management and profit differentiation point of view.