Price model in procurement

In procurement, what you buy is only half the story. How you pay for it, the price model shape cost, value, supplier behavior, and risk. Whether you’re sourcing cleaning services, software development, or logistics, the pricing structure you choose impacts your ability to compare bids, manage costs, and enforce performance.

This blog post introduces the concept of price models in professional sourcing, explores why they matter, how they connect to the RFQ and contract, and showcases real-world examples from various industries. If you’re a buyer in training, this is your guide to confidently selecting and applying the right price model.

Blogpost is connected to course Sourcing Process 2b.

Content…

What Is a Price Model in Procurement?

A price model is the structure that defines how a supplier charges for the goods or services provided. It governs the basis of cost—whether it’s per unit, per hour, per milestone, or performance-based—and reflects how value is measured and transferred between buyer and supplier.

Unlike price level (how much), the price model is about structure (how and when). Common models include:

Fixed price
Time and materials
Unit pricing
Cost-plus
Subscription or retainer-based
Performance-based
Milestone or deliverable-based

Why Price Models Matter

A good price model:

Aligns with the nature of the service or product
Encourages supplier efficiency and performance
Allows apples-to-apples comparison between bids
Reduces risk of unexpected costs
Supports contract enforcement and budget control

Different models suit different categories of spend and sourcing strategies. For instance, in the Kraljic Matrix, routine and leverage items may favor fixed or unit pricing, while strategic services might warrant performance- or milestone-based pricing.

Where Price Models Fit in the Sourcing Process

The selection of a price model happens at Step 5: RFQ preparation, and must:

Be reflected in the RFQ’s quotation instructions
Shape the evaluation criteria (e.g., total cost of ownership)
Be incorporated into the final contract (price list)

💡 Tip: Always define the price model before you invite quotations. If left open, you may receive inconsistent offers that are hard to compare—one supplier quotes per hour, another per project, and a third per outcome.

Overview of Common Price Models

1. Fixed Price

Supplier delivers a defined scope for a fixed total price.

Best for: Predictable deliverables with low change risk
Pros: Budget certainty, easy to compare bids
Cons: May lead to change orders if scope changes; suppliers may inflate bids to cover unknowns

2. Time and Materials (T&M)

You pay for actual time spent (e.g., hourly rate) and materials used.

Best for: Evolving scopes, agile projects
Pros: Flexibility, transparency
Cons: Cost can spiral without strict controls

3. Unit Price

You pay per item, user, or action (e.g., per user license, per meal served).

Best for: Repetitive or volume-based purchases
Pros: Scales with need, easy to audit
Cons: May discourage efficiency if supplier earns more from more units

4. Cost-Plus

Supplier charges actual cost plus an agreed margin.

Best for: Long-term services with uncertain effort
Pros: Transparent, ensures supplier covers costs
Cons: Little incentive to control cost; complex to audit

5. Subscription-Based / Retainer

Regular recurring payment (monthly/quarterly), often for a set bundle of services.

Best for: Ongoing access to services, e.g., consulting, legal support
Pros: Predictable costs, easier budgeting
Cons: Hard to measure value unless usage is tracked

6. Performance-Based Pricing

Payment tied to outcome metrics (e.g., cost savings achieved, service uptime).

Best for: Strategic services where performance drives value
Pros: Aligns incentives, rewards results
Cons: Requires clear KPIs and measurement; harder to set up

7. Milestone-Based Payment

Payments tied to deliverables (e.g., software beta, final report).

Best for: Projects with clear phases
Pros: Cash flow aligns with progress
Cons: Requires milestone acceptance criteria

8. Capacity-Based / Resource Pool

You reserve a resource (e.g., a developer or truck) for a fixed time period.

Best for: When availability matters more than usage
Pros: Guarantees access, simpler scheduling
Cons: May be underutilized

Supplier shares in both cost risks and potential upside (e.g., 50/50 split of savings).

Best for: High-stakes partnerships (e.g., transformation projects)
Pros: Deep alignment
Cons: Complex contracts and trust required

15 Mini Case Examples of Price Model Selection

Here are real-world-style examples of how different price models are used in practice:

1. IT Support Helpdesk – Fixed Price

A manufacturing company outsources helpdesk support. A fixed monthly price covers up to 500 tickets/month. Predictable demand and well-defined scope made fixed pricing ideal.

2. Marketing Design Retainer – Subscription

A cosmetics brand retains a creative agency for 40 hours/month of design work at a flat monthly fee. Workload varies, but they value priority access.

3. HR Recruitment Services – Success-Based

A headhunting firm is paid only when a candidate is placed (25% of first-year salary). This outcome-based model fits the business result.

4. Software Development Project – Milestone-Based

A startup contracts a development firm with payments at 4 milestones: prototype, beta, live launch, and 60-day support. Each has acceptance criteria.

5. Temporary IT Staff – Time and Materials

An IT contractor provides a business analyst for 3 months, billed weekly by hours worked, plus travel. Agile project needs justified this.

6. Facility Cleaning – Unit Price

A regional office buys daily cleaning priced per square meter. The cleaning firm invoices monthly based on the agreed unit price times area.

7. Legal Advisory – Monthly Retainer

A firm pays a law firm a flat monthly fee for up to 10 hours of legal consultation, ensuring availability without worrying about peaks.

8. Logistics Services – Unit Price

A logistics company charges per pallet shipped. The client’s volume varies, so unit-based pricing scales up or down easily.

9. Maintenance of Wind Turbines – Cost-Plus

A utility contracts a specialist to maintain turbines. Due to high uncertainty, pricing is cost-plus 10%, with detailed audits.

A consultant helps identify cost savings. They receive 15% of verified savings, incentivizing real value creation.

11. Digital Marketing Campaign – Performance-Based

An agency is paid based on number of leads or conversions. Works well when KPIs are trackable and agreed.

12. Event Planning – Fixed Price

An events company delivers a 2-day leadership conference for a lump sum. Scope was defined, minimizing risk of surprises.

13. On-Demand Translation – Unit Price

A translation service charges per word translated. Ideal for small, frequent tasks with low complexity.

14. IT System Hosting – Subscription

A SaaS vendor provides cloud hosting and support for a flat monthly fee, covering up to X users and Y storage.

15. Fleet Rental with Guaranteed Access – Capacity-Based

A delivery company pays a fixed fee for exclusive use of 3 trucks, regardless of daily mileage, to guarantee availability during peak season.

How Price Models Affect RFQ and Contracting

In the RFQ

Clearly specify the price model you want quotes to follow. This standardizes offers.
Include a pricing table or template for suppliers to complete.
Mention the contracting method (e.g., milestone payments, usage-based invoices).

In the Contract

Reflect the price model in payment terms and billing procedures.
For variable models (T&M, unit), include mechanisms to verify usage.
For performance-based, include KPI definitions, measurement tools, and payment adjustment clauses.

Tips for Selecting and Using Price Models

Match model to uncertainty: Use fixed price when scope is clear; use T&M or milestone if not.
Avoid hybrid confusion: If mixing models (e.g., fixed fee + success bonus), define them clearly.
Think from both sides: Will the model motivate the supplier appropriately?
Use templates: Pre-structured quote forms and contract clauses reduce ambiguity.
Get stakeholder input: Finance, legal, and end-users should weigh in on price model choices, especially for complex services.

Connecting Price Models to Price Lists, Cost Breakdowns, and Cost Indices

Price models don’t stand alone — they are closely linked to other pricing tools and techniques buyers use to gain transparency, compare offers, and manage long-term pricing. Let’s explore how three core procurement pricing concepts relate to the price model: the price list, the should-cost breakdown, and cost indexing.

Price Model and Price List: Structuring the Offer

A price list is a detailed table or form that shows how much the supplier charges for each item, service, or task. The price model determines the format of the price list.

In a unit pricing model, the price list might show prices per unit (e.g., per page, per km, per user).
In a time and materials model, the price list will show hourly or daily rates, along with prices for materials or travel.
In a subscription model, the price list will specify monthly/annual fees for different packages or usage levels.
For milestone or performance-based pricing, the “price list” may resemble a payment schedule, listing the amounts tied to deliverables or KPIs.

Buyer Tip: In your RFQ, always include a quote template or price list format aligned to your selected price model. This ensures consistency and comparability across bids.

Price Model and Cost Breakdown (Should-Cost Analysis)

A cost breakdown or should-cost analysis is a method used by buyers to understand what a supplier’s price is built from. It breaks the price into components: labor, materials, overhead, profit margin, etc.

In a cost-plus price model, this is essential: the buyer pays actual cost + margin, so detailed breakdowns are contractually required.
In fixed price models, buyers may request a cost breakdown during the RFQ evaluation phase to understand if the price is fair or if it hides inefficiencies.
In complex services (like consulting or engineering), requesting a cost breakdown helps the buyer compare value beyond total price — for instance, comparing hourly rates, time allocation, or markups.
Should-cost modeling is also a tool for negotiation. A buyer can say, “Based on market labor rates and estimated hours, this should cost €45,000 — please explain the gap.”

💡 Buyer Tip: Even if you don’t plan to audit costs post-award, asking for a cost breakdown during the RFQ helps clarify scope, improve negotiations, and avoid surprises later.

Price Model and Cost Indices (Indexation)

A cost index is a benchmark (often published) that tracks the evolution of prices in a certain category — such as labor costs, steel prices, or fuel.

In long-term contracts, especially with fixed or unit pricing, suppliers may ask for index-based price adjustments (indexation) to protect against inflation.
The price model determines whether indexing is relevant or allowed. For example:
- In fixed price contracts longer than 12 months, it’s common to include price revision clauses tied to indices (e.g., “Pricing will be adjusted annually based on CPI or the Eurostat Construction Index”).
- In subscription models, indexation may be applied yearly to align with wage growth or IT cost indices.
- In T&M models, labor rates may be adjusted annually using a wage index (e.g., “Labor rates will increase in line with the national IT services wage index”).

💡 Buyer Tip: When using price models that involve multi-year commitments, decide whether and how indexation applies — and specify this in both the RFQ and the contract. Make sure to:

Define the index used (name, source, frequency)
Clarify the adjustment frequency (annually, biannually)
Specify a maximum cap (e.g., “not to exceed 3% per year”)

Conclusion

Choosing the right price model is as strategic as choosing the supplier. It frames how you engage the market, compare bids, and govern delivery. In RFQs, clarity on pricing expectations improves supplier responses and evaluation. In contracts, alignment of price model and payment terms reduces friction.

Whether you’re sourcing routine cleaning or high-impact transformation, a thoughtful price model connects scope, value, and delivery in a way that benefits both parties.

As a buyer-in-training, practice identifying suitable price models for different categories. Use the mini-cases above as inspiration in classroom exercises. Over time, you’ll build the skill to design sourcing projects that are not just well-priced—but well-structured.