Example 3: Da Vinci International (Research Contract)
Professor John Smith from the School of Chemistry is negotiating a contract to undertake research for Da Vinci International (DVI) over the next three years. DVI is the world’s leading supplier of polyester-based paints. It is seeking to introduce new products to the Asia/Pacific region within 5 years, and requires the specialist expertise of Professor Smith, a current consultant to DVI, to solve a major technical problem arising in the manufacturing process. The potential market for DVI’s new products is around US$300M/annum.
The contract, if awarded, will enable Professor Smith to support two PhD students, employ a research assistant and purchase much needed equipment for the School. He will collaborate on this contract with a colleague, Dr Bill Brown. The entire project will be undertaken in laboratories within the School of Chemistry. Professor Smith is vaguely aware of the University’s policy on costing and pricing of contracts, but is having trouble working out just what he should be charging DVI for this project. He doesn’t want to lose this contract so is tempted to charge DVI for only the bare essentials.
Professor Brown’s draft budget for the 3-year project is shown below. He is pleased with this budget ($319,000) especially since DVI had already indicated (and Professor Smith had agreed) that it did not want to pay more than $300,000 for the work. He believes he can re-negotiate the price and couldn’t remember whether he had mentioned the University’s overhead charge to DVI.
| Labour (FTE) incl. salary and on-costs |
Cost |
Materials etc |
Cost |
|---|---|---|---|
| J Smith (0.1 @ $120,000pa) B Brown (0.2 @ $100,000pa) Student 1 (1.0 @ $20,000pa) Student 2 (1.0 @ $20,000pa) Research Assistant (1.0 @ $40,000pa) Admin Support (0.1 @ $50,000pa) |
Uni employee Uni employee $60,000 $60,000 $120,000 Uni employee |
Spectrometer Computer Consumables Travel Other |
$30,000 $4,000 $20,000 $10,000 $15,000 |
| Total |
$240,000 |
$79,000 |
Solution 1
Use the Budget Form for Research Contracts to determine the price that should be charged by the University for this project under the University’s Costing and Pricing Policy for Research. NOTE: GST does not apply as funds for this research are being sourced from an overseas company.
- Completed and annotated UoM Budget Form (Price charged by University)
The full price for this project, based on the budget prepared above, is the sum of all direct and indirect costs ($560,250 + $808,437 = $1,368,687). Although the full cost is generally never charged, it is a valuable and interesting figure to determine. Valuable because it can be used to determine other financial aspects, such as the distribution of intellectual property (IP) rights; interesting because it gives an accurate indication of the real cost of research, which is typically 2-3 times the price charged to a research sponsor.
- Completed and annotated UoM Budget Form (Full price)
Solution 2
Professor Smith and DVI have agreed on a final budget of $400,000 for this project. Complete the Budget Form again so the total project price is close to $400,000.
- Completed and annotated UoM Budget Form (adjusted price charged by University)