In this episode of the podcast, we discuss Non-Recurring Engineering costs for manufacturers. As the name suggests, these costs are usually one-off and are what it takes to get your product into production. These costs are perhaps better known as R&D costs, and it’s important to get to grips with them as they have a great impact on your product’s sale price, as well as the feasibility of manufacturing it in the first place.
It’s fair to say that the NRE costs often turn out to be more than initially estimated, so being able to accurately calculate them starts with understanding the many things that can be accounted for which can be everything from product design, to prototyping costs, certifications, wages for development staff, tooling costs, and much more.
Caution is required, too, as when working with a Chinese supplier they may swallow some of the NRE costs themselves, which sounds good, but they may expect something more in return than you’re willing to give up!
So, let’s get to grips with NRE costs in this episode.
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Here’s a summary of key sections of this episode:
✅ What are NRE costs? (A brief summary) – essentially NRE costs are all of the one-time expenses (investment) that you need to pay in order to get your product into production. A lot of it is engineering work, but not all. When planning your expenses, you will calculate the one-time NRE costs against the unit cost and cost of sales and distribution and decide how much to add to the unit sales cost in order to cover the NRE costs plus interest. This tends to be true for electrical/mechanical products. For apparel and shoes, it is usually simpler. There are NRE costs such as design and samples and checking the start of production, but then it is mainly recurring production work.
✅ Some examples of common NRE costs for the different production processes:
- Plastic injection molding – industrial designed parts in CAD, DFM review, rapid prototyping, tooling design and fabrication, trials to approve tooling, etc
- Metal parts – as above, but also cast molds, clipping tools
- Electronics – unique PCBA needs to be designed, stencils, artwork, outline guides, programming setup, drill profile, visual inspection, etc
✅ Going through some of the other processes and materials, and their costs – extrusion (plastic or aluminum), compression molding, silicone tends to be cheaper. Creating plastic parts can be done via 3D printing, CNC machining, or injection molding – each increasing in cost and also suitability for high volumes. Processes used are dependant on volumes required, so that should be taken into account.
✅ Why your NRE costs are probably higher than you’re initially anticipating – Renaud shares an example of real Sofeast customers who believed that their NRE costs were fairly modest and tried to keep them low by approaching upworkers, trading companies, etc, to handle the design and sourcing, but finally, have to accept that the NRE costs are far higher than they anticipated if they want to get the product made at the standard they require.
✅ Do some suppliers pay the NRE costs for you? – it may be that when purchasing very standard products, or white labeling products which have already been developed, that you won’t need to pay NRE costs as they have already been paid by the manufacturer who supplies them.
- The difference between standard ‘off-the-shelf’ products (little NRE cost), custom ‘off-the-shelf’ products (little NRE costs, but beware of ODM manufacturers selling these without actually owning the IP), and fully custom components, like a unique enclosure (higher NRE costs that you will need to pay for).
- Who will own the IP of the product if a manufacturer offers to share or take care of the NRE costs? This can happen as manufacturers try to lock you in by refusing to give you designs, BOM, etc, because ‘they developed it.’ You need to be wary of this. At the least, a manufacturer will probably try to claw back the NRE costs by charging you a higher per-unit price if they do work on the R&D side but grant you ownership of the IP.
✅ Using a development or development & manufacturing agreement to protect yourself – this sort of agreement will spell out who will own the IP, what information should be accessible to the buyer, and who is responsible for paying NRE costs. Some manufacturers in Asia will do this work with the expectation of retaining ownership of IP, etc, as standard practice, therefore an agreement protects against this happening.
✅ Most manufacturers are more interested in mass production rather than product development, so how does this impact you during the R&D stage? – in this case, the manufacturer doesn’t want to get involved with activities that accrue NRE costs such as product design, sourcing, etc. In this case, you may need to hire an engineering team or work with a company like us (Sofeast) who can help with the product engineering, supply chain side of things, compliance and testing, etc.
✅ How to gauge what the manufacturer is comfortable with doing for you – in general, the closer you are to production the more appealing a prospect you are to manufacturers, but you should look into their capabilities while sourcing suppliers and performing due diligence, as well as simply asking what they can do on the R&D side.
✅ If you have a prototype that is fully functional, you’re ready to give it to a factory and go into mass production, right? – No. This would indicate that you aren’t even halfway yet! Sourcing work, qualification of suppliers, DFM review, certifications, tooling design and fabrication, testing, and more, are still to be done. So, you can see how the NRE costs add up quickly.
✅ NRE costs you need to consider when projecting your costs – these activities typically full under the umbrella of NRE costs: design work, sourcing, supplier qualification, reliability and compliance testing, producing prototypes, getting customer feedback on the prototypes and making changes to them, creating the quality plan, fabricating tooling, putting in place testing stations and special checking fixtures, sourcing your assembly supplier, and negotiating a good manufacturing contract with them with a lawyer. Also for products with software, the firmware and app production tends to be created at an early stage as an NRE cost (although it will be updated later which also adds to it over time).
✅ Typical recurring costs – for comparison, here are some of the typical recurring costs you will also need to consider when developing and manufacturing a new product: the parts used to manufacture products, amortized tooling cost for custom parts in the per-unit cost (in some cases), material and processing costs for the parts, assembly costs (labor/factory overheads), scrap and rework, packaging, shipping, import duties and tariffs, dropshipping costs, returns and replacements, and warranty costs.
What are your experiences with Non-Recurring Engineering Costs? Did yours turn out to be higher than you’d initially estimated for? What, in particular, came as a surprise? Please share your experiences or advice by leaving a comment.
Additional content related to today’s episode…
- Summary of NRE
- What Are Your Non-Recurring Engineering Costs for Production in China?
- Why you need mature product designs before manufacturing in China
- OEM, ODM, Contract Manufacturers: Which Chinese Supplier To Choose
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