Pricing to Create a Prototype

You're being promised (maybe) a large order of an unusual product. But what do you charge for developing and producing the first prototype?December 24, 2012

I will be building a prototype cabinet to house electronics for a potential customer. I cannot give much more detail as I have signed a NDA. This would result in a regular monthly order quantity of 30-50 units that would fill-in our schedule nicely.

Who pays for the prototype? Their drawings are very preliminary and leave much of the design and joinery detail up to me which is fine. However, if they pay for the prototype, it belongs to them and they can use it to show to any other shop if my price does not fit into their budget. I expect to build at least two of these before we reach a final design. My best guess is the prototypes will cost between $500 and $800 to make initially and probably half of that to manufacture in the larger quantity.

Do you charge up front for the prototypes or distribute the cost to the bid over a few months of production? This manufacturer has not been down this road before either. My gut feeling is to charge up front for the prototypes and keep my salesman's hat on to seal the deal. Just wondering how others handle this situation.

Forum Responses
(Business and Management Forum)
From contributor M:
If production actually happens, kick them back half of it at a few bucks a unit. Never count on the promise of production, you will lose more than win that one.

From contributor H:
A bird in hand is worth more than two in the bush! Charge for it and if you feel necessary rebate the cost in the first ten paid units.

From contributor F:

A prototype will usually run about four-five times the cost of a 50 unit item purchase. There are a lot of factors like material purchasing power, efficiency of scale, machine setups, etc. We always bill what they cost. If you have to purchase custom tooling or pay for the design/shops/engineering then you charge for that. A lot of NDA's discuss who has ownership to tooling and drawings. That will affect the costs.

From contributor G:
I sometimes will give them the first article at the quantity price with a purchase order for the quantity.

From contributor W:
I run a shop where our bread and butter is commercial custom and we do a lot of one-off stuff. Many a builder and entrepreneur want to venture into my shop with the "build this one for free" or a desire for a big discount on the first one in trade for an order of a bunch more. One lady wanted me to carve "Steve Spurrier’s" face in a wooden football. I thought it was a good idea and prepped the file (I liked the idea and still do) yet she never came back. My standard answer is, "I have a better idea, how about full price on the first one and discounts on all subsequent orders". It runs them off or gets me a good client every time.

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From contributor J:
At this stage they are looking for someone to create a prototype, you. You bill for the prototype. The next phase will be someone to actually manufacture the project, hopefully you. You bill for these units. If you choose to credit them the cost of the prototype back, you do so over the course of the next 50 units or so, but the prototype cost is factored in to those 50 units. You should not pay any money for a prototype for a product/prototype that you are not selling.

From contributor O:
This is what we came up with. Your rate may be different. The last part is important though it may not pass the legalize department. Agreement for Prototype Design Work XXX Cabinet Inc. will develop projects at a rate of $100.00 per hour for all research, drafting, revision and engineering time. Once the project is at an approved stage in the design, production of a prototype of the item will proceed at the same hourly rate. At the completion of this process the client will own the rights to all paper and electronic files associated with the project. A separate agreement for production of the item will then be discussed. XXX Cabinet Inc. shall have no obligation to verify copyright or trademark issues regarding these projects.

From contributor S:
Any shop that produces one of a kind furniture or cabinets is building a prototype every time, and you charge accordingly. A client gets the benefit of a lower price based on quantity. They have to pay whatever it takes to develop the first one, and that is just part of R and D.

In our area there was a company that came around and asked us if we were interested in helping develop a massage table meant to go in a commercial location. If it worked out there would be 50 stores with 20 tables in each one. After a few phone calls it turns out they were contacting every shop in the area with the promise of future work. We didn't bother to even price it.