Many competitive programs contain two phases: research and development, and pro-

Question

Many competitive programs contain two phases: research and development, and pro- duction. Production profits far exceed R&D profits. The company that wins the R&D contract normally becomes a favorite for the production contract, as well as for any follow-on work. How can the dollar figures attached to follow-on work influence the cost package that you submit for the R&D phase? Would your answer change if the man-hours submitted for the R&D phase become the basis for the production phase?

Explanation / Answer

In this case one needs to determine realistic minimum cost. There should be comparison between the final cost to customers and most likely winning price. The gross profit margin for this proposal may be negative because the company should expect major profit margin from follow-on work . R&D phase is about proving the worth to the company and to show case its capability to deliver the thw work but actual costing works during execution. Moreover, the company can also share the cost R&D among other projects as well. Bid price for a profitable new business is determined according to actual cost

If the man-hours submitted for the R&D phase become the basis for the production phase then pervious answer will change. In this case we have to estimate cost realistically for minimum requirements and adjust cost estimate for risks. Desired Margin should be added to determine the price because production phase way have a high budget and we cannot risk the profit margin for most likely winning bid

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