Preparing Quotation Statements for Accurate Pricing

Every business that wants an order has to answer one question first: what price should we quote? Quote too high and the order goes to a competitor. Quote too low and the order becomes a loss-making headache. This is exactly the problem a statement of quotation or tender price is built to solve. It takes raw cost data and turns it into a defensible, profitable selling price, using the same logic as a cost sheet but tailored to a single buyer’s request.

What a statement of quotation actually is 🔗

When a buyer wants to purchase goods or get a job done, they often ask several suppliers to quote a price before placing the order. This could be a private company inviting quotes for office furniture, a government department floating a tender for construction material, or a client asking a firm to bid for a service contract. The supplier’s job is to work out, in advance, what the job will cost and add a fair margin on top.

A statement of quotation (also called an estimated cost sheet, or tender price statement) is simply a cost sheet prepared before production happens, using estimated figures instead of actual ones. It lists the expected direct materials, direct labour, and overheads for the specific quantity or job in question, then adds the desired profit to arrive at the quoted price.

The technique matters far beyond textbooks. In India, government departments and public sector units now route most of their purchases through the Government e-Marketplace, a national portal that runs competitive e-bidding and reverse auctions to get the best value for public money. A supplier bidding on that portal, or on any private tender, needs the same cost-plus-profit workings that this unit teaches – only the buyer changes, not the underlying logic.

Why the estimate has to be accurate 🔗

Two things can go wrong with a poorly prepared quotation. If the price is too high, the business simply doesn’t win the order – a lost opportunity, but not a financial disaster. If the price is too low, the business wins the order and then loses money fulfilling it, because the quoted price doesn’t cover the actual cost incurred.

This risk is well recognised outside classrooms too. The Institute of Chartered Accountants of India requires member firms bidding for professional assignments to maintain a documented cost sheet for every tender, so that the basis of the quoted fee can be reviewed if needed. The Institute has gone further and warned that quoting a fee far below what the assignment reasonably requires can invite disciplinary action, precisely because underpricing driven by guesswork rather than costing eventually hurts quality and sustainability. The same discipline applies to manufacturing and trading businesses quoting for physical goods. [Image: A businessperson reviewing a cost sheet and calculator before submitting a price quotation]

Building blocks of the statement 🔗

A statement of quotation is built from the same cost elements you already know from the cost sheet, applied to the specific quantity being quoted for.

Direct materials and direct labour 🔗

These are estimated first, usually based on the cost per unit incurred in the recent past, adjusted for any expected change in price or wage rate. If material prices are expected to rise before the order is executed, that increase must be built into the estimate – quoting on last year’s material cost is a common and costly mistake.

Overheads and absorption 🔗

Factory overheads, office and administration overheads, and selling and distribution overheads rarely relate to a single job in an obvious way, so they are recovered using an absorption rate calculated from past data – commonly a percentage of direct wages, a percentage of works cost, or a rate per labour or machine hour. For instance, if factory overheads have historically run at 60% of direct wages, that same percentage is applied to the estimated direct wages of the new order.

Profit margin 🔗

Once the total estimated cost is known, profit is added to arrive at the price. This can be expressed as a percentage on cost (profit added on top of the cost figure) or as a percentage on selling price (profit as a slice of the final price itself) – and the two give different results, so the basis specified in the question or business policy must be followed exactly. A margin of 20% on cost is not the same rupee amount as a margin of 20% on selling price.

Standard format of the statement 🔗

While the exact layout can be adapted, most statements of quotation follow this structure, usually shown with both a total column and a per-unit column so the price can be quoted either way:

A worked example 🔗

Suppose a manufacturer received an enquiry for 5,000 units of a component. Based on last year’s production of 4,000 units, the company has the following cost experience: direct material cost was ₹100 per unit, direct labour cost was ₹50 per unit, factory overheads have historically run at 60% of direct labour, office and administration overheads at 10% of works cost, and selling and distribution overheads at 8% of cost of production. Material prices are expected to rise by 5% before the order is executed, and the company wants a profit of 20% on cost.

Notice how each step feeds into the next – a mistake in estimating the material price rise flows through prime cost, works cost, cost of production, and finally the quoted price itself. This is why the statement is prepared in a logical, cumulative sequence rather than by simply guessing a lump-sum figure.

Points to keep in mind while preparing the statement 🔗

A few practical checks separate a reliable quotation from a risky one.

Use recent, relevant cost data. Overhead absorption rates and cost-per-unit figures should come from the most recent period available, not outdated records that no longer reflect current operations.

Adjust for known future changes. Expected increases in raw material prices, wage revisions, or fuel and freight costs should be factored in before the price is finalised, not discovered after the order is confirmed.

Do not confuse abnormal costs with normal cost. One-off losses, idle time due to a breakdown, or similar abnormal items from the past period should be excluded when estimating normal future cost, or they will unfairly inflate the quotation.

Watch for economies of scale. A large order may allow certain fixed overheads to be spread over more units, effectively lowering the overhead per unit and letting the business quote more competitively without sacrificing profit.

Be clear on the profit base. Always confirm whether the desired margin is on cost or on selling price before the final figure is calculated, since the two produce noticeably different quoted prices.

Where this shows up beyond the classroom 🔗

Estimating cost before quoting isn’t just an exam topic – it is a standard step in real procurement. Government buyers built the Government e-Marketplace specifically to run a transparent, largely paperless bidding process where suppliers compete on price, which only works if suppliers can confidently calculate a price that is both competitive and viable. On the professional services side, tender documents inviting chartered accountancy firms to bid for audit or consultancy work rely on the same idea: firms estimate the staff hours, overheads, and desired margin involved in the assignment, following guidance drawn from standard costing and procurement practice taught as part of the accounting curriculum, before submitting a financial bid. Whether it’s a component manufacturer, a service provider, or a construction contractor, the statement of quotation remains the bridge between “what will this cost us” and “what should we charge for it.”

What do you think? If you were pricing a large bulk order at a lower profit margin than your regular smaller orders, what cost or overhead assumptions would you want to double-check first before submitting the quote?

References

1. https://gem.gov.in/
2. https://tmdicai.org/costsheet.php
3. https://www.caclubindia.com/news/icai-warns-cas-against-extremely-low-tender-fees-disciplinary-action-may-follow-26632.asp
4. https://indiaai.gov.in/article/the-central-government-to-leverage-ai-in-gem-procurement-union-minister-piyush-goyal
5. https://live.icai.org/bos/vcc-3rd-batch/pdf/Chapter_2_Material_Costing.pdf