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How to price risk to win and profit | McKinsey on Marketing & Sales

Any project has an associated risk—delays, cost overruns, unexpected government interventions, market dynamics, etc. For large projects involving significant operational commitment, these risks can turn into considerable and unexpected financial costs. We’ve seen overruns hit tens and hundreds of millions of euros/dollars or more.

Despite these significant financial penalties, companies rarely give risk its due when it comes to pricing. In many cases, companies still treat risk as an afterthought. Large construction projects, for example, often simply add a standard “contingency cost” of 5 or 10 percent to cover the risks.

We believe that companies need to take a more deliberate approach to managing and pricing the risk in their portfolio. If risks and their potential costs are low for a project, the company can undercut competitor bids knowing they will still hit their target margin. If risks and potential costs are high, the company can either price the risk into the proposal or simply choose not to bid on the project.

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How to price risk to win and profit.

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