Costs and timelines
Why early quotes are wide, where development money actually goes, and why a prototype's unit cost is not the product's unit cost.
On this page
Everyone asks the same first question: what will it cost? The honest answer at the start of a new product is a range so wide it sounds like evasion. It is not. This page explains why the range is wide, what narrows it, and where the money goes.
Every figure on this page is either a general principle or a worked example. Nothing here is a quote.
Why nobody can quote a whole product up front
A full quote would require knowing every part, how each is made, how they fit together, which ideas fail on the first try, how many rounds of changes will be requested, and what testing will find. At the start, none of that exists. Anyone who gives a firm number for the whole journey at that point is guessing, has padded the number to cover the guess, or plans to bill the difference later.
Large companies get accurate numbers for new products because they have years of history: hundreds of similar projects, known suppliers, and estimating departments. A new idea from a new team has none of that.
The uncertainty curve
Think of it as a chart. Along the bottom is time, marked by versions of the requirements document. Up the side is how much is known, in three bands:
- Rough guess. Where every project starts. The numbers are placeholders.
- Assumed. There are reasons for the numbers, but they have not been tested.
- Known. Measured, quoted, tested, or frozen by agreement.
A line rises from the bottom band to the top as the project moves through its phases. Around the line is a band showing how far off the numbers might be. At the start the band is very wide. It narrows at each phase gate, because each phase turns guesses into assumptions and assumptions into known facts.
Two details matter. The line describes the document as a whole; some individual items stay loose long after others are settled. And revisions come often while assumptions are still open and rarely once things are frozen. Early on, a requirements document that changes every week is a sign the process is working.
Key takeaway Uncertainty is what development money buys down. Each phase is paid for in order to replace a guess with a fact. A quote that is precise before the facts exist is precise about the wrong thing.
What "plus or minus 20%" means
On a well-defined phase, with clear requirements and a known scope, an experienced firm can usually estimate within about plus or minus 20%. That is the best case. Early phases, and any phase with open requirements, swing much wider. An estimate given with a range and the assumptions behind it is more trustworthy than a single number given with confidence.
Where the money goes
The intuition is that hardware costs are about materials and tooling. In the development phases, they mostly are not.
Labor is the main cost driver. Development is paid for in expert hours: industrial designers, mechanical engineers, electrical engineers, firmware developers, manufacturing engineers, test technicians, project managers. In the early and middle phases, labor is typically the large majority of the spend. Materials and prototype parts are a smaller share than most people expect.
Tooling arrives late and arrives all at once. Molds, dies and fixtures are paid for in Preproduction. They are a large one-time cost, and they are the point where the design becomes expensive to change.
Certification is a line item. Regulatory and safety testing costs real money, takes calendar time, and is routinely left out of first budgets.
Revisions are normal. Several rounds of build-test-revise are part of the process, not a sign of failure. A budget that assumes one round is a budget that will be exceeded.
Unit cost is two numbers
A product's unit cost has two answers, and they are far apart.
Production unit cost is what one unit costs to make at the planned volume, using production tooling and processes, with parts bought in quantity.
Prototype unit cost is what one unit costs to make now, one at a time, without tooling, with parts bought in ones and work done by hand.
A worked example: the bracket
Consider a hypothetical sheet-metal bracket with one novel feature that needs custom forming.
| Amount | |
|---|---|
| Production unit cost, at volume | about $0.50 |
| Prototype unit cost, no tooling | over $10 per part |
| Prototype tooling for a 500-part run | about $5,000 |
| All-in cost for 500 prototype parts | about $10,000 (about $20 per part, effective) |
| The same 500 parts at production pricing | about $250 |
All figures hypothetical, for illustration.
The owner of this bracket had spent several thousand dollars on patent attorney fees before learning any of these numbers. The patent was not wrong. The sequence was. Learning the manufacturing cost first would have shaped the patent budget, the pricing, and the decision about whether to proceed at all.
Gaps of ten to forty times between prototype and production unit cost are common. Quantity drives most of it. Novelty drives the rest: a part that needs a new process costs more at every quantity than one made by a standard process.
Common mistake Budgeting one "unit cost" line. There should be two: prototype parts (a development expense) and production parts (a cost of goods). Mixing them produces a plan that is wrong in both directions.
Hourly versus fixed price
Engineering work is sold two ways, and each fits a different kind of work.
Time and materials (hourly). The owner pays for hours worked plus parts, against an estimate. Fits uncertain work: Feasibility, Proof of Concept, Prototype. The risk of the unknown stays with the owner, but the owner also keeps every dollar that the work comes in under.
Fixed price. One price for a defined deliverable. Fits known scope: a discovery phase, a requirements document, a specific change to a product already in production. The firm takes the risk, and prices it in. A fixed price for uncertain work is either padded heavily or will be renegotiated when the unknowns appear.
A common and sensible pattern: fixed price for discovery and the requirements document, then hourly against a phase estimate for development, with a new estimate at each gate. The fixed-price start gives the owner a predictable first cost and a document that can be taken to any firm for comparable quotes.
Business goals change the budget
How much development a product needs depends on what the owner is trying to do with it:
- License the idea to a larger company. A strong Feasibility result and a convincing Proof of Concept may be enough. The licensee does the rest.
- Raise money. Investors usually want a working, good-looking prototype and a credible unit cost. That means through Prototype, plus a solid cost model.
- Build a company and sell the product. The full path, through Production, including tooling, certification and a supply chain.
A product aimed at a premium cosmetic market will also spend more on surface finish, tooling quality and packaging than a product aimed at an industrial buyer. Even a rough business plan shapes engineering decisions more than most people expect, which is why the planning kit asks about it first.
How each phase is usually billed
Early phases are mostly engineering time, so they are usually billed by the hour or as a small fixed fee. Later phases add tooling and certification, which are quoted separately.
| Phase | Mostly billed as | Main cost driver |
|---|---|---|
| Project Initiation | Fixed price | Engineering time |
| Feasibility | Hourly | Engineering time |
| Proof of Concept | Hourly | Engineering time, small parts |
| Prototype | Hourly | Engineering and design time, custom parts |
| Preproduction | Mixed | Tooling, certification, engineering time |
| Production | Fixed price for changes | Parts and assembly (cost of goods) |
Try this (15 minutes) Write down the number that was in mind for "what this will cost." Then split it into four lines: engineering labor, prototype parts, tooling and certification, and production parts for the first run. Most first budgets have only the second and fourth lines.