Billing for prototype work, with full manufacturing rights.
I have been working with a guy since February on this prototype machine. Its a self-propelled walk behind machine for the dairy industry. It does a very specific job, that no other machine on the market has been able to do. We have modified existing machines on the market to do the job, and are about to finish our prototype. We are both very serious about seeing this thru. He is very happy with my work, and has given me full manufacturing rights. He only wants to do the assembly, sales, new product testing and tech support. We have also discussed legal contracts for my share of the sales. Once we are marketing these machines, he will carry full product liability. I will not be liable for anything but my parts. Which will also be in the contract before marketing.
I have worked in shops that did prototyping. I have worked on projects of similar size and complexity. Usually the total billing for these are $100-150K for prototyping on a $20K product. We are nowhere near that number and are about to start testing. Generaly I have about 20-30 hours per week into the design, machining, testing, and supply procurement. I have been billing him 10hrs per week plus materials, as i know he is on a budget. Even if it fails, I still made very good money and had fun working on it. He has also brought in a few more good customers.
Here is the question.
What would you guys be billing for something like this? Or, How would you bill this knowing that you have exclusive manufacturing rights?
I have made out very well on this and really don't care either way, but just wondering how you would handle this.
Never bill based on work that might happen. The shop I used to be at would do prototype work and then production would never happen. What we did do is offer a discounted price on future work.
I have done quite a bit of prototyping, and have always billed what I needed to, since I have no idea what will happen after the prototype stage. In my experience, having a good working prototype puts you about 10% of the way to a successful product, even though it seems like you are 90% "there" at that point. The sales and marketing is WAY more critical to having a successful product than anything else. A good salesman can sell a crappy machine, even if only for a while. Having a good machine to sell just makes it easier on him. If you have no control over the sales and marketing, you don't have much control over if you will ever be doing manufacturing of this machine. The future all depends on how many he can sell. So make what you need to now, and don't count too much on the future, unless he has made you a partner in his company.
I have made plenty of money so far. I am eating Steak and Lobster frequently along with buying more cool toys, just off of his work alone. He has a Dairy Consultant who is a good friend, that has been talking about these machines to customers. So far, there are 2 sold once all the bugs are worked out. Its very promising for the future, but we will see. And we are only in the Dairy market, there are a lot more possibilities for this machine. Plus we will be building another style of machine for higher production as soon as this one is running.
I am a little optomistic about this. Please don't beat me down too bad. This is the first time in 5 years things are looking up for me.
These have been some valid points.
What is a reasonable price range for a prototype of this nature?
Originally Posted by wgnrr1
I can't even afford hot dogs on 10 hrs./week, much less steak and lobster, so you're already doing better than I would.
Originally Posted by wgnrr1
I charge time and materials for prototyping, so the prices vary greatly. The price seems to depend more on how well the inventor has thought out the idea. A well thought out product seems to take much less time than one where they just have a half assed idea and are winging it.
I just got out of a situation like this. and if you want to be part of this into the future you need more than an exclusive manufacturing contract. 1 late delivery and your out of the game and he's outsourcing to china and laughing all the way to the bank and now your back to eating squirrels. ultimately i would avoid any and all thoughts about maintaining the manufacturing and make sure your paid for all your time and effort.
otherwise run like hell. my situation ended badly with my partners coming in and stealing everything over a holiday weekend. now we are trying to figure things out but its costing a bunch of money in legals fees.
He has thought this out very well. He started with the other machines on the market, that he fought with every step of the way. He has spent over $100K in 2 years on every machine on the market to try to try do the job. He was about to give up until we talked about it and his ideas. It was very strait forward. We modified his better machine first, and it is working well. But it was some heavy modification. Every job he runs now goes much better. There were several major issues to overcome with the existing equipment. But, he had every other machine out there that I could compare. I feel we have a good product, but we will see.
I do agree with you Barry. If he hadn't had such bad experiences with the other equipment, we would not be this far along. If you make it to my neck of the woods, I will buy you a hot dog.
Whoa, Whoa, Whoa! I thought we were on the steak and lobster plan, and now I'm getting a hot dog? LOL Actually I get up your way fairly often chasing old Chevy parts in Trego and Earl.
Originally Posted by wgnrr1
I use to get all involved into pouring my guts into getting someone's prototype working. I would think of it as "my" baby. The inventor thought of the product, and owns the right to it, and thinks of it as "his" baby. The sales and marketing people get the product on TV and in the big box stores, and now it's "their" baby. I finally figured out that I have no rights to it. It's not mine. I'm a hired gun called in to solve a problem (create a working prototype). I solve that problem, get paid what I need to, and prepare to move on with my life. If more work comes my way, so be it. The biggest product I ever helped develop moved all it's production to China so fast it would make your head spin, once it became obvious that the product was going to be a winner that was going to be mass produced. The big box stores actually forced the company that owned the product to produce more of them at a cheaper price, and those new plans in no way, shape, or form included me. That's fine.
I also still work on some molds occasionally that I originally prototyped parts for almost 15 years ago, but those parts aren't such a big seller. If they were a big seller, the molds might take a long ride on a big boat, and I wouldn't see them again. That's fine too. That's why I say I get paid what I need to now, and leave the future for the future.
I'm wondering if the only thing that exists at preseent is a verbal agrement. If the whole thing should prove to be a success then can you be dumped in favour of another supplier? All it'd take is one disagreement and it needn't be major.
If you aren't losing money on what you've done so far then great. Do you have any binding agreement for future involvement? Money and business don't make for good friendships.
Sounds like the story told by a guy who used to work here... Before he came, he and a "partner" were building an injection molding tool for an inventor of some firearm related item... IIRC, a pistol grip that would incorporate a tamper proof counter, so police, security guards, etc. would be forced to account for every round they fired. Anyway, the inventor kept leading them on with talk of all the molds they'd build, once they got this one to produce good prototype parts. In talking with our guy, he said that the tool he was working on made parts for one particular Sig Saur model, but each different make and model would require an new tool, and he and his partner would incorporate and rent space for a shop when that happened. I told him not to get his hopes up, all the inventor wanted was functional parts to demonstrate the concept to Sig, and at that point he'd promptly sell his rights. And so it went, they finally tweaked the mold so it ran a full set of parts, and the inventor sold out out to Sig, and was never heard from again. If I recall, he even abandoned his prototype mold.
Originally Posted by Barry Weeks
Keep in mind the story of Robert Kearns, the inventor of the intermittent windshield wiper. Great idea. Solid patent. Kearns' problem was he insisted that HE was going to do the manufacturing. He should have just sold the patent. There was just no way that any of the "big three" were going to wait for him to get tooled up, or leave him in the position where he could sell the same idea to their competition. Kearns eventually won his patent suits, but ruined his life in the process.
As the late Mayor Daley once famously said, "A verbal agreement isn't worth the paper it's printed on." Neither is a written agreement, when the product takes off and there is so much money being made that they can afford a full time legal staff just to f*ck with you.
Charge well for your time, because it's the last money you are likely to see from this project.
I have some experience with IP and can sympathize with your situation. It's easy to do development work for someone who you may be friends with but in the end you have to treat it like any other business arrangement.
Like Barry pointed out, Marketing is everything and marketing to farmers is even harder.
Of course written agreements have limitations, but something on paper is 1000 times better than a verbal agreement.
I'd do something like this: take a cold hard look at the entire business to assess whether it is worth putting more effort into.
Rather than a share of the business ( not worth the effort) invoice him for the full amount of the work you have done or at least what you think is fair. Then write up some sort of agreement that in lieu of royalties you will just get paid down the road for work you've done in the past. Make it simple and clean.
Every one of these situation is different but I like to be optimistic.
I wouldn't ask for manufacturing rights because you can't guarantee you'll always be competitive on price and if I was the owner of the product my long term goal would be to build the business to the point where I could sell it to someone else. And you don't know what the new owner might do.
Also keep in mind that any prospective buyer will NOT want to buy a product line that has any lingering royalty agreements or other encumberances.
Product development is always a massive crapshoot. Bit I'd try to distance yourself from his business as much as possible and just work out something so you can get paid for the work.
Typically, prototype machinists don't have high production manufacturing capability. Do what you do well and charge for it.
Promises are cheap and most of the time, even free.
Everyone here will tell you to bill by the hour and materials, that means full shop rate. But you'l have to get hosed once to beleive it.
I think the OP needs to think a little more. Assuming it's a killer product, even if the OP has an armor plated contract, once the VC guys come in or it's sold to a bigger outfit, he's done 'cause he lacks the muscle to defend his interest (assuming his interest survives the sale).
Looking over the thread everyone's saying about the same thing: learn from the mistakes we made.
Kearn's story is actually worse than that. Back then, (late 60's), it was the big 3 plus AMC. The automotive industry has a long history of never paying for a patent. They will steal it, or not use it, but have never paid for the patent. Kearn then spent the rest of his life trying to sue those who wronged him, and the pursuit consumed him completely. He drove his wife and children away, and gave up all his potential future earnings to lawyers to file the next suit. He died friendless and penniless.
Originally Posted by Modelman
I think he only won 1 suit, which was for over $1M against Chrysler. The verdict was immediately appealed and I don't believe Kearn ever collected a penny. And he got his patent rights extended, but what good is a patent for a mechanical timer in a digital world.
Dont let these guys get you down. Most everyone has been taken advantage of more than once and learned the hard way, myself included.
You can make this fairly easy for you..
In this situation, this is what i do.
First we do market research and find out what the possibilities are. This is where you make or break yourself, so be truthful.
With a concept, i get a real PO..
Then i do the design work and prototype WITHOUT PAYMENT. Crazy hu? Well, i dint sell them MY design, they didnt pay for any of my time and the design stays with ME. Everyone can create ideas, but not everyone can do the real design work. The agreement is simple, I tell you what i can make it for, we agree on a retail, dealer, distributor pricing and i get full MFG rights. Remember, i also OWN the desgin....If the party goes elsewhere to source the widget then i am free to sell it as my own product.
NO lawyers, no contracts just simply based on PO's, honest work and honest people. So far, its worked out great!
Reading through this thread has me wondering, You are an all manual shop correct? do you have the capacity to meet the monthly unit requirement if it takes of? Do you have any cnc or production background? or interest in learning it? the reason I ask this is if you can't keep up it would be easy for the parts to walk down the street to the next shop with these capabilities. If this guy has a brain he will want to protect his investment which is why you need to start protecting your time and money.
I agree with seekins I have worked in shops that operate this way before. Many medical shops operate like this as well they will do the prototypes for free for manufacturing rights but i can without a doubt guarantee that it is not on a handshake or verbal agreement.
Sounds like you're ok with the deal so far overall, and as such I would not really think about it much further.
Now if it was something that can be mass produced elsewhere more efficiently than you could, it might have been smart to partner up with the guy in some way from the start.
If you do make the production you'll recuperate the cash, one option was to put a clause that you have to do the first X amount of units to recuperate the balance, and after that its business as usual.
I do Prototypes all the time. I have ben screwed, ONCE. You work 20 30 hours a week but only charge for 10! Are you crazy! If it does not work out / sell, you hozed yourself. If it does it will go to china and then you got hozed by your "partner". Ether way you lose. I do prototypes billing for all hours at shop rate + materials. Paid Bi weekly, get behind, I work on another project that is not behind on payments. I make this clear when the dreamer walks in the door. The chances of Your "partner" sharing the "big money" are about 0. Get paid for your work, if your aim is to get rich invent something yourself, if it goes your in fat city.
Only you know if you can trust this guy. I have a few customers I will do prototype work for at 50% of shop rate as I have always gotten the production runs. Since I did all the prototypes I designed them for easy fast machining that I could charge a good rate for. Yes I got burned once before doing this, live and learn.