Thread: Customer wants to cancel order

Hi all,

I'm fairly new machine shop and I'm curious how you guys handle the following.

Customer came in with (for me) a fairly big complicated project.
Which required quite a few measurement checks and design (cad) work. Once ready the parts could be machined.
The part (small serie) was quite complicated and required some special tooling and fixtures. And the material costs are quite high (which I've already bought)

I've spend quite some time reverse engineering the original part.
I have designed a fixture for the parts. Since it's a pretty complicated part to make
Tooling is bought
Material is bought and in stock

So last step was do to some final dimension checks, some small design details and program the part.

But due to circumstances the customer doesn't need the parts anymore.
For this kind of work the customer always pays 50% of the total amount in advance. So everything is covered.
But how to work this out?

Let him pay for the tooling? and take my loss on the design work?

Glad you're at least partially covered. If your country's tax structure considers types of income versus losses, his payment/your loss should go to whatever has the best tax advantages. If you have an accountant, discuss the matter with him/her.

If it's all part of the quoted job that they sent the PO over for, then they should pay for all work done along with tooling and material. Whether or not you want to give them the good guy discount is on you.

I would calculate how many hours i have into the job and charge an hourly rate (Rate up to you).
See if you can return the tooling.
If not, i would give him the tooling and material.
Charge him for the cost for time, material & tooling.
Its not your fault that the job was cancelled.

Sam

Not sure I’d give them the tooling. What’s a customer going to do with it? If they had the machine it fit, I’d assume they would make their own part.
Not to mention it took time to research, order and inventory the tooling. It’s all this small(not usually itemized) stuff that kills new/small shops


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Originally Posted by tcncj

Hi all,

I'm fairly new machine shop and I'm curious how you guys handle the following.

Customer came in with (for me) a fairly big complicated project.
Which required quite a few measurement checks and design (cad) work. Once ready the parts could be machined.
The part (small serie) was quite complicated and required some special tooling and fixtures. And the material costs are quite high (which I've already bought)

I've spend quite some time reverse engineering the original part.
I have designed a fixture for the parts. Since it's a pretty complicated part to make
Tooling is bought
Material is bought and in stock

So last step was do to some final dimension checks, some small design details and program the part.

But due to circumstances the customer doesn't need the parts anymore.
For this kind of work the customer always pays 50% of the total amount in advance. So everything is covered.
But how to work this out?

Let him pay for the tooling? and take my loss on the design work?

If the customer is paying 50% do they get the CAD files and reverse engineering work ?

Why are you talking about 'loss'

figure your time and materials[and profit] and bill them

deposit is a credit on the invoice.

If they do not like your math they can take delivery at the agreed upon price

I don't know the Netherlands but the CCP (Code of Civil Procedures, which governs most commercial dealings in the US) states that you are entitled to the profit you would have made on the job, less whatever amelioration you can find to fill in that time you would have spent.

So, at least in the US, you are entitled to the profit you would have made on the job.

How you decide to handle that is up to you.

I'm curious when you say everything is covered...then mention taking a loss on the IT/design end.

To me everything is everything and far from limited to the actual physical aspect. The design, reverse engineering and providing methods of production can be the really tough part and the expensive part of a job like you mention. Yes, in the beginning its offered as a perk of doing business with you, a perk offered to get the job and recoup.
But they walked...if its because you did not live up to your end...you take your lumps. But after you deliver and they have a change of mind...unless they come up with an alternate offer I'd build your bill including all time, machining and design along with tooling and material and submit. Do not pad the bill...make sure you can justify pricing if asked. They see where it goes. They may pay, ask to be met in the middle, they may bring you in on a new project or give you work to compensate.
This is were you show what doing business with you will be like. An easy push over, a hard ass all or nothing...or someone to work with, we all take a bit of a hit and move forward.

FYI- I used to do stuff like that for a guy. Some projects we made, others we lost...actually I lost, he didn't make a profit. He "liked me" cause I was the best at designing what was needed, design, redesign till I got it right. Then made some money. BUT then too many projects never got off the ground and the hits came my way too often. That was till I started charging for the design aspect, even at cost it quickly became an issue. Spending My time to design was fine with him...till it dragged on his pocket.
I liked working with him...but it cost me too much and he helped me learn that lesson.

I would bill all hours used, tools and material bought. No question asked.

If he got a problem with that (sure he dosent) I would just tell him the full bill is the only alternative.

If you do otherwise you might aswell just start handing out free money on the street.



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Originally Posted by EmanuelGoldstein

So, at least in the US, you are entitled to the profit you would have made on the job.

I think you meant to say that you are entitled to the profit you would have made on the part of the work done, not the whole enchilada.
Much depends on customer.
In the case of a canceled order in the US auto would you bill your time spent at your end rate and purchased components plus a reasonable and normal markup on them.
You must be able to document your time, all tooling and fixtures are sent to the customer. (sort of silly since they will just scrap them but they bought it)
If you want to get paid for it all reverse engineering and CAD files are also theirs and you must hand it over. Again they bought it.

In a place I worked at we sent in a bill for 2.5 million along with the work in progress, all tooling and prints and got paid in 60 days.
With a smaller customer it can be way more difficult and the fine print on your end and theirs on the PO and acknowledgement can matter a lot.
I've also been burned with the entire value of the project. Better yet is when they take delivery and file bankruptcy only to start up with a new name 60 days later using what you never got paid for.
Twice happened, once a handle-able problem, once the death of me and liquidation of all my assets to stay breathing and above ground as I was doing the big dollar project on borrowed money.

Most will never think to document order cancellation fees or terms until in goes bad and then it is too late.
My suppliers have this in their quotes.

Handing someone a bill for work done and money spent is very different than getting paid.
Larger places are more use to this, a smaller or middleman often simply can't or won't ante up.

Do not just send a bill, talk to the customer and try to work it out. You will find out their position rather quickly
Bob

Originally Posted by CarbideBob

I think you meant to say that you are entitled to the profit you would have made on the part of the work done, not the whole enchilada.

Actually, no. CCP may vary between states (I think not too much tho ?) but in California if'n you got a purchase order or agreement, then you are entitled to the profit from the job. You are required to attempt to mitigate any shortfall by selling the vacated time to other people but if times is bad and you can't, they owe you the profit.

Much depends on customer.
In the case of a canceled order in the US auto

I'm only talking about legality. Auto constantly fucks over their vendors. Laws only apply if you enforce them, and no automotive supplier is going to destroy their future over such petty things as being screwed.

Automotive is scary, from a business aspect. Making the parts is bad enough but those guys play rough and they got the big bucks for knee-breaking

Handing someone a bill for work done and money spent is very different than getting paid.

You got that right. And civil, jeeze. What a swamp filled with rodents of unusual size

Do not just send a bill, talk to the customer and try to work it out. You will find out their position rather quickly

That's usually best. But in the US at least, look into the CCP and have an attorney advise you, if the numbers are big enough. One phone call saved me five grand once, which is peanuts to the big sharks here but bought a few lunches down at the old ranchero.

Bill for the hours and costs you have already incurred.

Whats the point of a PO if it can be canceled at the 11th hour, that is the entire reason for a PO.
If they were going to own the final design, I would even give them what you have so far, in all fairness they are paying for it.

In the US, the customer here would be in breach of contract and technically could be sued for the value of the entire contract. I'd not recommend that and a better course as mentioned above would be to bill for all work and tooling done.

Myself, I would consider it a learning experience. Most of us have been in difficult situations with customers. Get over it and move on, consider yourself lucky to have some costs covered. Next time be more careful. Live and learn. Shit happens....

It could be worse. How much are you talking about? Are you prepared for a potentially expensive legal skirmish? Is your customer a reputable company or an "inventor" with a dream? Does your customer have the means to cover your "losses" if you prevail in court?

Originally Posted by Doug

Myself, I would consider it a learning experience. Most of us have been in difficult situations with customers. Get over it and move on, consider yourself lucky to have some costs covered. Next time be more careful. Live and learn. Shit happens....

It could be worse. How much are you talking about? Are you prepared for a potentially expensive legal skirmish? Is your customer a reputable company or an "inventor" with a dream? Does your customer have the means to cover your "losses" if you prevail in court?

I 100% agree. The learning part can be much more valuable than any recovery of money. I recently put $3K (50% down) down on a custom machine "add on". Long story short, the guy looks like he never made it. Since he was out of my country, the cost of trying to get any of it back would be much more than just chalking it up to a learning experience. I came so close to pulling the plug when he didn't accept VISA. It's all on me but I truly learned my lesson. Not the same situation you're in, but just weighing the cost of recovery against the cost of just learning, moving on and earning money doing other things.

I'll also add one other thing: the quicker you can produce your customer's product, the less chance it gives them to cancel, change, bug you about where the order is, etc. Get stuff done quickly with clear payments/terms and, if it's a first or unstable customer and you don't have the payment, put it on hold!

Good luck,
The Dude