![\"product-development-model-assembly\"](\"https:\/\/cdn.cadcrowd.com\/blog\/uploads\/2020\/02\/product-development-model-assembly.jpg\")
<\/figure>\n<\/div> Get your cost estimate too high and you risk affecting your positive relationships with your suppliers. A cost estimate that is too low will quickly eat into your profit margins and even wind up with you making a loss per unit. <\/p>
Here, we\u2019re going to explore:<\/p>
- \n
- The different theoretical approaches to cost estimation<\/li>
- Why understanding these theories will make your PCE more accurate<\/li>
- Different factors that affect your costs<\/li>
- The processes you need to follow that will cost you money<\/li>
- Things you need to consider when estimating the costs of your product<\/li>\n<\/ul>
Ultimately, you need to know how much your product costs to make so that you know how much to sell it for. Get the right price and you\u2019re on the way to turning a profit from your product, so read on to make sure you know how to estimate your product engineering service<\/a> costs. <\/p>
![\":rocket:\"](\"https:\/\/a.slack-edge.com\/production-standard-emoji-assets\/14.0\/google-medium\/1f680.png\")
Table of contents<\/strong><\/p> - Theories about price cost estimation<\/a>
- The quantitative approach to PCE<\/a><\/li>
- Taking the qualitative approach to PCE<\/a><\/li>
- Which one will work for my project?<\/a><\/li><\/ul><\/li>
- How to do a price cost estimate<\/a>
- Estimating costs at the design stage<\/a><\/li>
- Costs with your preliminary design<\/a><\/li>
- Schematic design or 3D model stages<\/a><\/li><\/ul><\/li>
- What you\u2019ll have at this point<\/a><\/li>
- Costs of prototyping<\/a><\/li>
- More than materials<\/a>
- Legal costs<\/a><\/li><\/ul><\/li>
- Challenges of cost estimation<\/a><\/li>
- Fixed costs<\/a><\/li>
- Summing up<\/a><\/li><\/ul><\/div>
Theories about price cost estimation<\/h2>
With so much money going into the process of designing and manufacturing products, it\u2019s no surprise that there has been plenty of academic research in the field. There are plenty of people who make a career out of estimating costs, and the Bureau of Labor Statistics has the role<\/a> increasing by 9% between 2018-28, which is faster than average. <\/p>
There are two basic ways to estimate costs, and there have been plenty of models and theories posited around them. <\/p>
The quantitative approach to PCE<\/h3>
When a cost estimator uses a quantitative\napproach to their job, they look at:<\/p>
- \n
- The design<\/li>
- The features that the product
will have <\/li> - The processes that will go into
production<\/li>\n<\/ul>They use this information to analyze variables and resources that will be needed to provide a cost estimate. <\/p>
Getting a quantitative cost estimate for design and rapid prototyping services<\/a> isn\u2019t going to be easy. This process is best suited to having a detailed product design in place. There needs to be a lot of information at hand to be accurate, although it will normally give you a very detailed picture of what you can expect your costs to be. <\/p>
Although not well-suited to the initial\nstages of product development, it\u2019s worth knowing about the process. Further\ndown the line of your path to market, you can commission this type of estimate\nto make sure that you\u2019re on track.<\/p>
Taking the qualitative approach to PCE<\/h3>
Rather than just looking at the raw data\nabout the project like in the quantitative approach, this method takes a look\nat previous projects and their costs to give an idea of what your project will\ncost. A cost estimator will have a database of projects and will look for\nsimilar ones in terms of:<\/p>
- \n
- Materials<\/li>
- Processes<\/li>
- Design specs<\/li>\n<\/ul>
They\u2019ll also give you an estimate based on\npast experience. <\/p>
The data that you get is only going to be rough because it\u2019s not based exactly on the product that you want to make. Particularly if you\u2019re making something innovative or with lots of customized pieces, there might not be any reliable historical data to work with. <\/p>
RELATED: Tips for outsourcing new product development and design<\/a><\/strong><\/p>
If you\u2019re looking to make something that\ncan use a lot of existing components and isn\u2019t completely off-the-wall, yet\nhaven\u2019t gone much further than the idea and pencil drawing stage, a qualitative\nPCE can produce numbers that are pretty reliable. <\/p>
Which one will work for my project?<\/h3>
It\u2019s going to come down to which stage in the design and prototype process you\u2019re in as to which cost estimate method you choose to go for. It\u2019s best to be looking at your costs early on before you put too much money into what you\u2019re doing. Get too deep money-wise and you might feel you\u2019re committed without having an idea of how deep your pockets need to be. <\/p>
\n![\"head-exchant-design\"](\"https:\/\/cdn.cadcrowd.com\/blog\/uploads\/2020\/02\/head-exchant-design.jpg\")
<\/figure>\n<\/div> Coming to the cost estimation party a little late? Once you\u2019re into the product development<\/a> process and have a fair idea of what you\u2019re doing and what you\u2019re going to need, a quantitative approach is probably going to work well. Remember to look back at the money you\u2019ve already put into the project at this point too. <\/p>
Being more prepared and thinking about\ncosts early is going to send you down the path of a qualitative cost estimate.\nThis is going to need plenty of research about past projects and also what\u2019s\nalready available on the market in terms of:<\/p>
- \n
- Components<\/li>
- Tools<\/li>
- Materials<\/li>
- Skills<\/li>\n<\/ul>
Whichever method you go for, you can do the\nnumber-crunching yourself or bring in a professional cost estimator who will\nhave access to industry databases. <\/p>
How to do a price cost estimate<\/h2>
Getting a grip of your costs might sound\nrather academic and like a whole load of number crunching\u2014and you can choose to\ngo down that route\u2014but you can do some initial research by finding out the costs\nof other projects. <\/p>
A useful source of information about past projects that are similar to yours is to investigate design firms and freelancer sites. Looking at how much a freelance product design service<\/a> or prototype engineer is going to charge for their services is a good way to see what\u2019s involved in getting your project rolling. <\/p>
It is going to be an ongoing process rather\nthan a one-time thing. Think about the process of buying a first home. First,\nyou get an idea of how much money you can afford to spend each month, then you\nfind out how much you can borrow, look at what that can buy you, and then find\nout all the extra expenses like fees and taxes. All along the way, you\u2019re\nrevising what your costs are going to be.<\/p>
Doing a PCE for your product idea is\nsimilarly not a one-off activity, but something you should be returning to at\nevery stage to plug in the extra information that you garner.<\/p>
Estimating costs at the design stage<\/h3>
The decisions you make really early on in\nyour design and prototyping will affect costs massively. It\u2019s at this stage\nthat crucial decisions are being made that will dictate everything else going\nforward. This is the point where you need to choose priorities such as product\nquality versus product cost. <\/p>
Things to take into consideration while\nestimating the cost of your design are:<\/p>
- \n
- Design module availability\u2014<\/strong>This means whether the pieces that you need to realize your design are on the market and how easy they are going to be to procure<\/li>
- Manufacturing services<\/a>\u2014<\/strong>Are there tools, robots, and factories out there that can make your product?<\/li>
- The extent of customization\u2014<\/strong>You probably don\u2019t want to be using all off-the-shelf components for your product, so you need to understand how many things will be custom made for you and how complicated those pieces are<\/li>
- Design complexity\u2014<\/strong>The more moving parts, joints, circuit boards, pieces of software, etc. that you need, the higher your design and prototype costs are going to be<\/li>\n<\/ul>
These should be tackled when putting\ntogether your preliminary design. <\/p>
A good designer will be able to conceptualize\nyour product while keeping an eye on costs, although it\u2019s up to you to set\nparameters and priorities. By drawing on the skills and knowledge of your\ndesigner, you\u2019re using the qualitative approach to estimating your costs. <\/p>
Costs with your preliminary design<\/h3>
Your preliminary design will be a test of\nthe feasibility of your idea; the first time you check that things might\nactually be able to work together. You will find out a lot of information at\nthis stage that will start to bulk out your cost estimate for your prototype\nand your end product. <\/p>
Once you\u2019ve got your preliminary design,\nyou should have an idea of:<\/p>
- \n
- The components that you\u2019re going to need<\/li>
- How complex your product will be to produce<\/li>
- The materials that you can use with your product<\/li>\n<\/ul>
And this will go into your Bill of\nMaterials (BoM), we\u2019ll go into more details about this a little later. <\/p>
Schematic design or 3D model stages<\/h3>
Depending on what you\u2019re making, you\u2019ll need to get a more detailed design in the form of a schematic for electricals, or a 3D model for something like a toy. You’ll probably want to work with a 3D product modeling service<\/a>. This is when you start to get more details and can maybe start moving towards a quantitative cost estimate. You\u2019ll have more specific details about what you will need rather than generalizing. <\/p>
Here\u2019s where the details about materials\nwill get drilled down and you will understand more about the processes you are\ngoing to need to employ. It\u2019s also when you will have the specifications for\nyour prototype laid out, so the cost of producing it should really start to\ncrystallize at this point. <\/p>
What you\u2019ll have at this point<\/h2>
Once you\u2019ve got through the design stage,\nyou will have begun racking up a fair amount of costs. If your early price cost\nestimates were done with some detail, you shouldn\u2019t be surprised at your\ninvestment up to this point. <\/p>
Along with a pile of invoices and expenses,\nyou will also have a Bill of Materials. This is a list, likely a spreadsheet,\nof everything you are going to need to produce a single unit of your product.\nDone properly, this document will have started out with some general ideas and\nmorphed into a list of every single piece needed. <\/p>
To get a cost estimate for your prototype, you can start by adding together the price of one of everything on this list. Add to that the cost of your prototype design engineering services<\/a> and you\u2019ve got a reasonable idea of how much you need to spend on your prototype. Just remember, everything you\u2019ve spent up to this point also goes into the final costs. <\/p>
You should also be looking at Minimum Order\nQuantities, even before your prototype. You may only need two LEDs for your\ntoy, but you may have to buy these LEDs in quantities of 10,000 from the\nmanufacturer. Look at your purchasing needs early. <\/p>
Costs of prototyping<\/h2>
A prototype will cost vastly more than an item when it\u2019s in production. Because of the money you\u2019re going to be pumping in at this stage, it\u2019s worth spending a little bit on design reviews. Having professionals who haven\u2019t been in the design process check over the drawings is like checking your math homework. It seems boring and unnecessary when you\u2019re confident, but you\u2019ll kick yourself if you\u2019ve made a silly mistake.<\/p>
\n![\"geometry-machine\"](\"https:\/\/cdn.cadcrowd.com\/blog\/uploads\/2020\/02\/geometry-machine.jpg\")
<\/figure>\n<\/div> A prototype is going to help you figure out\nyour costs further down the line too. You\u2019re unlikely to produce a fully\nworking production-spec prototype the first time around, but as you refine your\nidea, you will be able to use the prototype to get your Bill of Materials\nabsolutely spot on. <\/p>
More than materials<\/h2>
Up to this point, the focus has been on the\nmoney you\u2019re going to spend on getting the product made. This is a big cost\nindeed, but the cost of getting to this point also relies very heavily on\nlabor.<\/p>
The design process needs:<\/p>
- \n
- A skilled design<\/li>
- A consumer product design service<\/a><\/li>
- A prototype engineer<\/li>\n<\/ul>
And there are different ways that you can\nassess costs for these. For all of the labor that you choose to use, there are\nthree models for how you will pay them. They are:<\/p>
- \n
- Per hour<\/li>
- Per project<\/li>
- Salary<\/li>\n<\/ul>
Freelancers and 3D design studios<\/a> will normally give you a price based on the first two. Or you can choose to bring in someone to work for you directly and pay them monthly. <\/p>
There are ways that you can keep a lid on\nlabor costs, such as working with designers who are outside of North America.\nTo understand how much your design costs are going to be, you can use the\nqualitative method. That is, look at how much companies have spent previously\non a design of similar complexity. <\/p>
Another major factor that will feed into\nyour labor cost estimations for designing and prototyping is the level of\nexpertise you are going to need. A designer who can put together a new\nmotorbike design is going to have more skills and higher rates than a designer\nyou employ to design a children\u2019s board game. <\/p>
Legal costs<\/h3>
Along with the human costs that will go into designing and prototyping your product, you need to think about the paperwork. An innovative product needs to have protection, so you will need to investigate getting a patent. <\/p>
RELATED: How much does it cost to make a prototype for my new product invention?<\/a><\/strong><\/p>
There are lots of things that you need to\nconsider with patents, including getting special drawings made and whether you\nwill need to hire lawyers. This will all feed into your cost estimate and\nyou\u2019ll want to get it done at the design stage to ensure your intellectual\nproperty is protected as you start to share your idea around. <\/p>
Non-disclosure agreements (NDA) are an extra cost that you need to consider. When using freelance mechanical engineering services <\/a>and engineers through Cad Crowd, you are assured that everyone on the platform has already signed up to an NDA, meaning that you can just factor this point into your freelance hiring costs. <\/p>
Depending on what you\u2019re producing, you\nmight also want to be looking at costs for certifications and other legal\nrequirements as you move to the prototyping stage. Products such as toys need\nto meet certain requirements, and electrical items need safety testing, for\nexample. Considering these costs when your prototype is being made can save\nextra costs down the line. <\/p>
Challenges of cost estimation<\/h2>
According to a study<\/a> out of Aberdeen University, the three biggest challenges when managing costs on a project that is producing a product are:<\/p>
- \n
- A lack of overall
perspective, <\/strong>meaning that the big picture is looked
at early on so that costs just roll in without having an understanding of where
they belong in the process. This is why you need to be assessing your costs at
every stage, plugging in your new data into your current estimates, and moving
from qualitative to quantitative estimation as you know more details<\/li>- Taking too long to
understand costs <\/strong>means that decisions can get held
up. For example, if your designer needs to know whether to use aluminum or
magnesium alloy to finalize the 3D model but you\u2019re having to do a load of
calculations in a spreadsheet, things can get held up. Planning ahead and
understanding your cost variable early on will make things quicker<\/li>- Raw material cost
fluctuations <\/strong>aren\u2019t really something you can have
much of an effect on for some products. However, you can think smart when
you\u2019re conceptualizing and designing and choose materials that have less
volatile market prices<\/li>\n<\/ol>Knowing these challenges before getting\nstarted in estimating costs of design and prototyping will help you choose the\nright methods of calculation for you. <\/p>
Fixed costs<\/h2>
An industrial design services job<\/a> will have many more fixed costs than someone with an idea willing to take a punt. Clearly, they are going to have very different fixed costs to take into account. <\/p>
\n![\"rotary\"](\"https:\/\/cdn.cadcrowd.com\/blog\/uploads\/2020\/02\/rotary.jpg\")
<\/figure>\n<\/div> A fixed cost is something that you\u2019d have\nto pay, no matter what stage of the production process you\u2019re in. For example,\nyour internet and phone connection, any staff that you employ, and office space\nthat you rent are going to need to be paid each month, regardless of where\nyou\u2019re up to.<\/p>
You will need to take these costs into\naccount when estimating how much money you need to put into your project.\nWorking on more than one project will mean only taking into account a\nproportion of these costs into each product, but to ensure that you\u2019re going to\nmake a profit from your idea, you still need to build these into your cost\nestimates. <\/p>
Summing up<\/h2>
The costs of getting your idea through the\ndesign and prototype stages and heading towards production cover three main\nareas:<\/p>
- \n
- The materials that will be used<\/li>
- The costs of hiring the people
to design and engineer your product<\/li> - Fixed costs for running the
business<\/li>\n<\/ul>It\u2019s not always easy to get an accurate estimate of these costs, and that\u2019s why there are plenty of people who make a lucrative career out of being a cost estimator. The complexity of the item you want to produce will decide whether you need to bring in a professional 3D modeling design freelancer <\/a>or whether to do it yourself.<\/p>
In the end, the things that will influence\nthe costs of your design and prototype are:<\/p>
- Taking too long to
- A lack of overall
- A prototype engineer<\/li>\n<\/ul>
- Manufacturing services<\/a>\u2014<\/strong>Are there tools, robots, and factories out there that can make your product?<\/li>
- Design module availability\u2014<\/strong>This means whether the pieces that you need to realize your design are on the market and how easy they are going to be to procure<\/li>
- Challenges of cost estimation<\/a><\/li>
- Costs with your preliminary design<\/a><\/li>
- Taking the qualitative approach to PCE<\/a><\/li>
- The quantitative approach to PCE<\/a><\/li>
- Theories about price cost estimation<\/a>