Astana Expo Services LLP - Relevant Costing for a Fixed-Price Bid with a Penalty Risk
Astana Expo Services LLP is invited to bid for the logistics of a three-day international forum in September 2026. The client's ceiling is a fixed KZT 26,000,000, with a penalty of KZT 5,000,000 if the build is not completed 48 hours before opening; management assesses a 10% probability of late completion. The finance team prepared: direct materials KZT 16,000,000; specialist crew 400 hours at a recharge rate of KZT 15,000 per hour; variable event overhead KZT 1,200 per crew hour; apportioned head-office overhead KZT 2,500,000 (5% of revenue); design work already incurred and paid, KZT 2,000,000, with no alternative use; staging equipment purchased for KZT 8,000,000 with a committed resale value of KZT 5,000,000 immediately after the event, or identical equipment hired for KZT 3,400,000. The crew is 80% utilised; accepting the forum would require turning down another confirmed job that yields a contribution of KZT 3,500,000. Crew are paid KZT 9,000 per hour whether or not they work. The company's policy is to bid only where expected margin is at least 8% of the bid price.
1. Compute the minimum relevant cost of undertaking the forum, explaining the treatment of each cost item.
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Relevant (incremental/opportunity) cost build-up
| Item | Amount (KZT) | Reasoning |
|---|---|---|
| Direct materials | 16,000,000 | Incremental cash outflow |
| Crew labour | 0 | Paid KZT 9,000/hour regardless of activity; not incremental |
| Opportunity cost of crew | 3,500,000 | Taking the forum displaces a confirmed contribution of KZT 3,500,000; this is the true economic cost of the 400 hours |
| Variable event overhead | 480,000 | 400 hours × KZT 1,200; varies with the job |
| Equipment | 3,000,000 | Lower of net purchase cost (8,000,000 − 5,000,000) and hire (3,400,000) |
| Design work | 0 | Sunk; paid and no alternative use |
| Apportioned head-office overhead | 0 | Not caused by the job; allocation only |
| Total relevant cost | 22,980,000 |
Note the trap: the recharge rate of KZT 15,000 and the cash wage of KZT 9,000 are both irrelevant. Only the displaced contribution matters, and 3,500,000 is materially less than 400 × 15,000 = 6,000,000, so the bid is cheaper than the accounting schedule suggests.
Risk-adjusted cost = 22,980,000 + (10% × 5,000,000) = KZT 23,480,000.
Minimum price at the 8% policy margin = 23,480,000 ÷ 0.92 = KZT 25,521,739.
2. Should the company bid at the KZT 26,000,000 ceiling? Quantify the expected outcome and the probability of lateness at which the bid becomes marginal.
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Expected value at the ceiling
- Margin if on time: 26,000,000 − 22,980,000 = KZT 3,020,000
- Outcome if late: 3,020,000 − 5,000,000 = KZT (1,980,000)
- Expected margin: 0.9 × 3,020,000 + 0.1 × (1,980,000) = KZT 2,520,000, i.e. 9.7% of price
This clears the 8% policy threshold (minimum price KZT 25,521,739), so on expected value the bid is acceptable - but only by about KZT 480,000.
Break-even probability of lateness (p) (1 − p)(3,020,000) + p(−1,980,000) = 0 → 3,020,000 − 5,000,000p = 0 → p = 60.4%
The assessed 10% risk is far below break-even, so the decision is not finely balanced on risk alone. The real exposure is the downside: a single late completion converts a 11.6% margin into a KZT 1,980,000 loss, which is roughly two-thirds of the expected profit.
Recommendation. Bid at KZT 26,000,000 subject to negotiated protections: a cap on liquidated damages, penalty liability limited to delays caused by the company, milestone-based completion dates with client-caused relief, a binding resale contract for the equipment before purchase, and confirmation that the displaced job cannot be rescheduled into a different month.
3. What qualitative and contractual factors should the board weigh beyond the KZT 2,520,000 expected margin?
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Strategic and relationship factors
- The other confirmed job: declining it may damage a repeat client, and the KZT 3,500,000 contribution is certain whereas the forum's KZT 2,520,000 is expected value only.
- Reference value of a flagship international forum versus reputational damage if the build is late in front of foreign delegations.
Operational and delivery risk
- Crew are already 80% utilised; September is a peak period, so overtime, fatigue and quality risk are real, as is the risk of overrunning into the next engagement.
- The 48-hour completion condition is tight for a three-day build; assess the critical path, supplier lead times and permit approvals.
- Foreign participants bring visa, insurance, customs and data-handling obligations that can create cost not in the schedule.
Financial and cash-flow factors
- KZT 8,000,000 cash outlay for equipment before recovery of KZT 5,000,000; the resale must be contractually committed, otherwise the relevant cost rises to KZT 3,400,000 (hire).
- Payment terms: if the client pays after the event while materials and crew are paid before, working capital peaks.
- Material price escalation clauses; a 10% rise in materials wipes out the expected margin.
Contract terms to negotiate
- Cap on liquidated damages and exclusion of consequential loss; force majeure; extension of time for client or authority delays; variation pricing; and a clear acceptance protocol so that "completion" is objectively defined.