In a recent post I discussed the importance of charging customers for engineering time on custom-made designs through an NRE; non-recurring engineering charge. After all, custom-made parts divert engineering and production resources from standard product lines. Companies must be willing to charge for custom designs in order to recoup the profit that can’t come from large scale production. In it I provided an overview of the steps I’ve used with my own customers when they’ve had to use engineering charges with customers. Today I thought I would outline those steps in a sample non-recurring engineering charge excel pricing sheet.
1. The first portion of the excel sheet includes the material needed for the custom made part. The left hand portion, under the headline “1. Material”, allows you to input your material requirements on the design. The “Quantity” & “Cost”sections allow you to input your purchasing costs on material and sub-components. I’ve included a 5% indirect cost of material to account for any standard cost variances from actual costs when the raw material and parts actually arrive.
2. The second portion entitled “2. Labor” includes three variables. One is the set-up time for each production operation. Next is the run time for each operation. Both of these are in minutes. Set-up time in manufacturing is largely ignored by companies. However, it’s an essential aspect of a company’s manufacturing costs. Finally, the “cost/hour” allows you to input your company’s labor costs for each manufacturing operation.
3. The third section entitled “3. Design Time” allows the company to include its engineering time, drafting time and production package inspection time. This time must be put in hours. In addition, there is a cost/hour for each portion of the design aspect of the custom made part.
4. The fourth section is where the company inputs its overhead percentage. This can be done in the blue shaded box of “4. Overhead”. In this case I’ve applied a 30% overhead on the direct material and direct labor costs from section 1 & 2. Please note, I didn't apply the overhead on the design time from the third section - although some may argue that it is indeed justified. I'll leave this up to you.
One could argue that design time should be considered as a direct labor expense in designing the product. However, the multiplier more than makes up for this. Some companies have higher overhead and some less. If you need input on determining your company’s overhead, please read: Calculating Overhead Rate & Percentage for Small Businesses.
5. The fifth section entitled “5. NRE Multiplier”is the company’s way to ensure that its non-recurring engineering charge covers the costs of diverting the company’s engineering & production resources from standard product lines. Those standard product lines account for 100% of the company’s revenue. This means the company must determine how much of its revenue is spent on research & development during a given year. Next, it expresses this value as a percentage by a multiple, or multiplier, that coverts back to 100% (the company's revenue). For example, if your company spends approximately 8% -10% of its revenue on R&D, then the non-recurring engineering charge multiplier would be 12 (8%x12=96%) or 10 (10%x10 = 100%). This engineering multiplier covers the costs of diverting production and engineering away from standard product lines.
Here is the sample non-recurring engineering charge excel pricing sheet: Download NRESHEET
Special Note: The above doesn't include profit on sales. For a similar excel sheet, please refer to Manufacturer Price Sheet: Direct Material, Direct Labor, Overhead & Profit
Every “blue”highlighted section of this sample engineering charge pricing sheet allows you to input your own variables. Most of my customers start off small when charging customers for engineering time. However, the importance is in charging for engineering time and design time. It’s an essential aspect of properly managing customer expectations and setting the stage for charging customers for larger custom made designs later on in the relationship. Remember, manufacturing custom made parts always diverts engineering and production resources away from large scale production. As such, your customers must be willing to accept the costs that come from having a custom made part.
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