Thread: Billing for prototype work, with full manufacturing rights.

It is good to have enough work, that you can discuss the price to charge. I did a lot of "Special Projects" for my last employer, as well as more developement, and short runs of repair parts at home for the same person.
From my experiences, charge what it takes to cover the costs, and pay yourself enough to keep you out of Arthur Treacher's. If there is some capital investment to be made for this program, it would be to your benefit to ask Mr. X to assist in the cost(50%). This should reduce the chance of you becoming a stranger to him, after the new equipment is wired, and before the first payment comes due. If he balks, run! Get your first deal paid for first.
I ran into a purchasing agent who was sleeping with an auto body man, who became an over night machinist, which took away slightly over half of my garage shop sales!

"Good judgement is based on experience, and experience is based on poor judgement."
Regards,
Bob

We do prototype stuff all the time, BUT and heres the but, we'll only do it for our regular customers and we'll still bill them for the hours used

Eg I've just completed a batch of parts thats made us about $4500 in profit(we do about 4-5 batches a year) , now I've been handed a prototype part to do for the same guy.... it may cost us $1000 to make but because its a regular customer, he'll get it a fair bit cheaper.($50 off knowing our boss )
It may work, it may not and perhaps we'll get the production batch, but we wont hold our breathe and sure wont devote any more resources than we need to to get the part made

We've also had customers in the past come in, give us a bunch of drawings and some money, with the promise of production work if the part pans out....after building fixtures and creating programs, the customer is never seen again, and if contacted says "you lot were too expensive" and thats after we took a loss on the parts.

If your customer is offering you production rights on a part(s) , make sure he signs a contract to that effect and make sure he's aware of the cost of the parts when moving to full production.

Boris

<<another one of the burned fingers manufacturing club

Originally Posted by wgnrr1

...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...

This makes me want to vomit. Seriously, everybody is going to tell you about their "budget" in order to get you to do something for less...and you fell right into it. Ask yourself, do you really think he would give you 10-20 hours/week of HIS time for free???

Hell no, he won't.

If he values your abilities and resources, he will pay you. As much as you want to believe in this project, you have no idea what other variables are in his life/business that can cause him to drop you tomorrow. If you're in the mood to be generous, then work out his discount when production starts.

If I think back, I've made quite a few prototypes over the years. Almost all except maybe the first (~30 yrs ago, medical device by a knee surgeon), for very tiny niche markets. I've never expected to get rich, or be able to "control" anything once the prototype is out of my shop. I've always assumed that if it turned into a marketable product, there were hundreds of people smarter and more experienced than me who could then refine it, do it better, or merely get the manufacturing process so far down it would not be worth it or even possible for me to make them. I have also mostly worked with people at one level or another that I "trust". Funny word, and no expectations on my part. You also have to trust that people will generally do what is in their best interests. It's the way the world works.

So I just happily bill T & M, generally for every minute devoted to the project; and consider it a fun ride while it lasts. Depending on person and circumstances, they pay aprox 1/2 each weeks bill (or more) and the cumulative balance can sometimes come in over time a 1/2 yr later if it is needed to facilitate the job.

Actually, a number of my "successful" prototypes were merely one shot tools for construction projects that took weeks of scale labor out of very unique and specific jobs. So it was truly worth several thousand$ to the purchasers to have a one shot, throw away tool, for that one contract.

Anyway, I consider it fun when it happens, no further expectations except maybe if it saves them money, they will be back to me with the next idea they need turned into something useful.

That reminds me: around 30 yrs ago, a guy i had done some construction contracts for with decent income but that I did not really trust well, approached me about modifying a chop miter saw, to include a sliding feature so his crews could also use it to crosscut boards up to about 12 - 16" across on intalls. This was well before the compound sliding miter saw was familiar, though I don't know if there may have been patents or designs out at the time that he could have seen. I thought it was a good idea, and told him that the fastest way would be to butcher a Rockwell for components, build/modify a frame with Thomson Ball bushings, and that it would not be terribly hard to accomplish, but it would cost him about$750 - $1,200 ( ~ early 1980 dollars) & I wanted 1/2 to start. He pissed and moaned and never went any further.

smt

Originally Posted by gbent

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.

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.

I didn't remember the movie being that depressing, according to wiki he received 40 mill between ford and chrysler, but was still a train wreck

to the OP: have worked with various inventors over the years, they rarely amount to anything. Had some fun tho. Don't turn down real work to work on this. Don't get your hopes up. If it works out, great.

I would suggest writing and showing bills for full amount, with discounts for future work, if you think that appropriate.

Originally Posted by wgnrr1

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?

Josh

Sounds like you at least are happy with what you've made so far. That part is good, but, if you want to get full value for your time instead of giving a freebie, and you're willing to risk getting the balance based on the success of the product, have him sign a promissory note for the balance with payment based in the success of the product. No success, no payment. Success = full payment plus interest which is all that you should get.

An agreement like that will work even if he goes elsewhere to get cheaper mfg. or sells the idea.

Originally Posted by wgnrr1

Hi Guys,

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.....................

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.

Josh

One question.... Is this something which is planned to be patented?

Cash or equity. Bill full bore for your time, and if he claims he's one a budget, then say "OK, then let's draw up a contract where I get partial ownership for the balance of my time".

Kind of like ass, gas, grass, or cash - nobody rides for free.

Originally Posted by bosleyjr

Cash or equity. Bill full bore for your time, and if he claims he's one a budget, then say "OK, then let's draw up a contract where I get partial ownership for the balance of my time".

Kind of like ass, gas, grass, or cash - nobody rides for free.

I agree and it's the same as hearing, "I have a problem. How will you fix it?"

Originally Posted by wgnrr1

Hi Guys,

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.

Josh

Time+ material. Period. "Show me the money" isn't just a movie line. And don't forget to bill for "engineering" time, including drafting, programming, and such. Read the posts responding to your question. There have been so many people screwed in this sort of a thing it boggles the mind. Alright, I'm easily boggled. But you catch my drift, I hope.

Might be careful about billing for "engineering" time if you're not really an engineer, and have the parchment and insurance to back it up.

I haven't seen a discussion of potential market size. If it's for dairy farms, if it's a huge hit will you sell thousands? Is there any real chance you would sell hundreds of thousands/a million?

Converting your non-billed time into equity in a legal partnership would be worth investigating.

Chip

All the previous info is on the mark, from a variety of perspectives and experiences. As you can see, individual experience with product development schemes varies greatly, and the results are very uncertain in most cases. Doing this sort of work is always a crap shoot, and you have to figure out where you are on the "faith" spectrum, meaning, how much do you personally believe in the product that you are helping to develop? How much time and effort can you afford to "give" to the development process? Those questions drive the way you will ultimately handle the work, the billing, and the potential downstream "we hit it big" arrangements.
Practical issues: The prototype costs (what you should charge) scale up, in my opinion, based on YOUR assessment of the complexity of the work, the potential value of the product (which includes its perceived value or uniqueness in the target marketplace), and whether others can do the work you are doing. In the case of setting up any potential arrangement for future royalties, GO AHEAD and do it, just realize that if you don't have a bullet-proof contract covering any and all permutations of the possible circumstances, then there will be legal inroads possible. In many cases, royalty contracts are good for participants for years, where substantial income is derived, until something changes like ownership stakes, or product competition, or some other factor that causes overall review of cost structure. At that point, maybe you get bought off, or legalized out the door, depending on how the contract is structured. It can't hurt at all to have something in place now, just don't count on having a golden goose for your later years unless you know the product is successful and you do have good legal work on the contract. Many times it's as much trouble for the company to worry about a royalty contract dissolution as it is to let it stand until something else happens.