Why your fixed price quote for product development may be a warning sign
We’ve all done it. You ring a potential supplier and ask very quickly how much their premium service will cost?
Or more importantly. Is the cost I am investing in this supplier going to give me enough value to justify it?
Because often this is the difference between whether you will use this supplier or not.
The fact of the matter is, as humans we like certainty. We want to take risks to create amazing things, but we want to do so knowing exactly what it will cost us in time, money and emotional input.
Poppy spends a lot of her time talking with inventors on Ignys discovery calls. Her knowledge gained from quoting and arranging numerous electronic product development projects, alongside our team of creative engineers, provides valuable insight into this question:
Is a fixed price really as great as it sounds?
Is a fixed price for product development really right for you?
Often using fixed pricing for design projects can make you fall into one of two different traps.
Scenario One – Product development fixed price. Where you end up paying too much
You may end up paying a lot more than you need to if you ask for a fixed price.
Why? Because your design partner will want to factor in as many risks as possible to avoid them being out of pocket. They will want to account for any scenario that may occur where they need to do more testing, more of an engineer’s time is needed, or there is a change to the specification.
In this scenario they may have allocated a lot more time to the project than it ends up taking, essentially meaning extra profits for them and eating into your budget unnecessarily. Product development is costly enough as it is without paying for imaginary time!
Scenario Two – Product development fixed price. You aren’t paying enough
Surely that’s great right? Wrong! If you get quoted 25K for a project you thought would cost 50K, chances are it probably actually costs 50K or more.
The fact is your design partner, however lovely they are, has a business to run and will try and match their own quote in terms of time and resources. Even if they are quoting a great price with the best of intentions, the chances are they are holding back on something to achieve this budget for you. And that something may be a crucial element you can’t afford to miss out on. So are they…
- Rushing to complete in time? Meaning less opportunities to check their work
- Using a less experienced engineer who isn’t fully up to the task?
- Skipping peer reviews? Leaving more open to mistakes
- Ordering lower cost or quality materials to meet a deadline or budget leading to problems later?
- Missing crucial testing or feasibility steps?
- Potentially risking a higher fail rate due to problems left unchecked or not spotted in the first place?
Or underestimating some of the work needed entirely and end up doing all of the above in an attempt to fix it.
Sometimes you do strike gold. If you are a pessimist at heart maybe your project does turn out to be cheaper than you budgeted for. Just tread cautiously if it sounds too good to be true.
And speaking of pessimism…
We’ve all heard of the glass half full and half empty analogy.
It’s the same when people are quoting for fixed pricing. Here are two cases where this comes into play.
The over optimistic engineer
Have you ever written down 20 things you are going to do during the working day only to find you have completed just 5 of them?
It’s very easy to overestimate what you can do in the short term. If a confident engineer sees your specification, they may think they can complete the first section in 3 days and assume that there will be minimal problems.
They want to do a good job and if they are familiar with the type of project you are on, they may give you a great quote for a short amount of time.
What could happen?
- They open a schematic they had allocated half a day to, for just a review piece, and then find it needs 4 days and a complete redesign.
- Maybe a file won’t import properly, and you lose half a day’s time to it?
Suddenly they are behind and, in this case, they are left to either come back and tell you your budget isn’t high enough (which may mess up your plans if you have set your finances accordingly) or they may rush the rest of the project leading to potential faults.
The experienced pessimist
Here is the opposite scenario. An engineer has just completed a tricky project rather similar to yours in terms of the design or software requirements and is on high alert.
They know that a particular section of the spec took them 5 days last time and quotes accordingly. They’ve been bitten once and they won’t be underestimating again!
So why might they be wrong?
- They have learnt from the previous project and that 5 day job even with the same technical problems will now take them 3 days.
- Your project may not have the same problems as the other project and therefore their 5 day guess is too pessimistic.
Essentially you end up paying for their own pessimism.
The bottom line. With a fixed price for product development there is always a loser.
Will it be the design partner or the customer? Will the losing party be YOU?
Ok you ask, that’s all well and good but I need a cost to plan my project effectively and I need answers quickly.
What’s my alternative to a fixed costing?
This is where cost ranges come in.
How to achieve a more accurate costing using price ranges instead of a fixed price for product development
What is a range cost?
A range cost looks at the best and worst case scenarios so instead of your quote being a set number, for example 80K, the quote may say 70-90K. But more importantly when done correctly, this type of quote will also tell you WHY this is the case. This has a number of benefits:
The pros of using range price instead of a fixed price
- It gives you extra sustainability – If you plan your project with a range in mind, quoted in detail by an experienced consultancy, then you can prepare for the worst whilst knowing you may still have the extra funds at the end.
- You can win back ‘time costs’ – As long as your design partner provides you with regular updates broken down by time you can be safe in the knowledge that you won’t spend more on the engineer resource cost than you need to.
- It gives flexibility for the must haves – At the start of the process sometimes you can afford to put less in for example when you are making an MVP and don’t need it to be fully functional or aesthetically pleasing. However later down the road you’ll want to ensure that you don’t miss out on anything that you need to have.
- It provides more accuracy – You may ask how can a range possibly be accurate? But when its a detailed quote with a clear breakdown on what could go wrong the quote shows you what the best and worst scenarios are so you can plan for both cases.
What to watch out for when getting quotes for product development
It’s always good to speak to at least two design consultancies before reaching a decision, not only to compare costings but to check expertise and get a feel for how they work. When it comes to price here are some of the red flags to watch out for.
- Avoid just comparing on price – By opting for the cheapest option you could be missing out on valuable expertise or a more accurate costing.
- Is your specification detailed enough? – If your design is drawn on the back of an envelope it is a starting point for discussions but its not enough for a full scale quote. Also, If you are on fixed price and something in the spec changes it can cause delays as the company you are working with will have to reassess the quote they’ve given you to work out a new price. It can be difficult going and asking your MD, finance director or investor for more money when they’ve already signed off the first amount. They might not always be understanding about spec changes.
- Get NDAs in place before you start chatting – If your idea is brand new technology and it’s a secret keep it that way. Ask your future design partners to give you written reassurances that they won’t take your idea to a competitor or even design it themselves.
- Consider how much BoM can vary – Your Bill of Materials is highly dependent on supply and demand. There may be shortages with some components which can affect lead time. Beware that what components cost now (when you aren’t ready to buy them in bulk), may change rapidly within a 6 month window.
- Being too honest with your budget before you can trust them – It’s often like a game of chess, you get asked for your budget and then have to try and give them some level of accuracy without giving the whole game away. If you say 25K on a 15K project some may try and build in costs to bring it up to the 25K under a contingency excuse when giving a fixed price. This is why a ranged cost where time is tracked and charged accordingly can be more transparent.
- They don’t provide a face to face meeting – If you don’t get time with the engineers working on your project or at least a knowledge source before it starts this leaves the quote open to misinterpretation, if they are quoting fixed prices off a vague preliminary spec this could be a red flag. If there are too many unknowns it will be harder to quote accurately.
- They give you a range without breaking it down – This is probably the reason you aren’t keen on range costs in the first place. A ballpark range without a plan is just a licence for that upper limit to be reached.
Consider going down the feasibility route
It may make more sense to spend money on a full feasibility study to provide you with more detail on how to move forward. This will not only help with the technical aspects but also the commercial side too. Let’s say you want to make a time machine to retail at £50 but the components cost £500 or they will take 5 years to obtain? This isn’t going to work and you need to consider the alternatives.
What to do when a fixed price is essential
If it’s absolutely necessary for you to get a fixed cost, because of how your company works for approvals or you need an absolute number for an investor or loan we recommend paying the company to spend a few days on a feasibility study in order to provide you with a more accurate quote and detailed plan with evaluated risks
Your next move…
We hope this has helped you. Now it’s your turn to go forth and find some quotes or find more tips in our other blogs.
Related article – If you liked this article you’ll love ‘should I use the same partner for design and manufacture?’ – Read it now
If you’re interested in how we quote at Ignys here’s some more information:
How Ignys do pricing
We start by joining you on a discovery call where you’ll get the chance to tell us about your project, bounce ideas off us and ask initial questions.
If you enjoy talking with us about your project and we seem like a potential right fit for you, we’ll give you the chance to speak in more depth to our engineering manager about the technical nitty gritty of the project.
We then use a set of rigid calculations to obtain range costs. We work closely with you to create the best specification in order to create the best accuracy in quoting your project, allowing you to plan ahead with more reassurances.
We take our open and honest values very seriously. As such we like to give you a feel for if your ideal budget is going to work at first as well as whether your timeline is realistic for you and realistic for us, availability wise, so you can make the right choice for you.
Would you like to explore whether we are the right fit for you?
Blog authorship: This article was created with the knowledge of Poppy Sinclair Sales Manager and Hannah Ingram Marketing Manager. Poppy has extensive knowledge quoting for electronic product development projects of very different sizes both in terms of project size and complexity and company size. Hannah Ingram has worked in high value B2B companies for over 10 years where fixed costs often come with their own challenges.