What’s the issue?
The cost of developing a product ready for market must be budgeted. Clients don’t want development on an open budget, but so many variables come into play that it isn’t prudent for any developer to give fixed budget guarantees – especially if Engineering Specifications aren’t complete. That said, there are measures and methods that can be used to control, monitor and predict outcomes. The following give guidance on these.
What can change and affect cost during product development?
The three main phases that are certain to change during a project are:
- The market: the market is ever changing, and companies that don’t constantly listen to and adapt to their markets suffer. A few examples follow:
- Clients are often very warm about new ideas before they exist. When it comes time to commit new requirements often surface.
- We are all in a chain. Every client has a client that results in the possibility of an unpredictable change.
- The market itself may move, or more pointedly, have different directions available and the development team are left trying to decide what’s most likely. An example that now seems clear but wasn’t a few years ago (2020 ish) is the car market. Was there going to be a mass move to hybrid vehicles? The death knell for diesel hadn’t really sounded, but 3 years later it appears to have done so? Electric cars had a pitiful infrastructure, and still do as at 2023/24, and it seemed a mass move to them wasn’t practical. Imagine what it was like for car development during this era. Notions of requirement could change very quickly.
- The market model changes: for example, it was initially thought that the product needed basic functionality only and must be as low priced as possible, but delivering the project and investigation revealed that a premium product with a full set of features at premium price are required.
- Technical performance: effective product assessment is almost entirely empirical. Whether or not a product will satisfy needs requires that prototypes are built and tested, and it is a cinch that each prototype will change ideas about what’s required. No matter how thoroughly specifications have been compiled, it is inevitable that prototyping cycles will result in specification changes. Also, typical electronic circuits have hundreds of components, which often each have data sheets hundreds of pages long. It is unreasonable to expect there will be no errors and all will right first time.
- Manufacturing: there is a big difference between a prototype design and one that can be manufactured in volume. The Operations Journey highlights the many things that must be covered if a professional operations system is to be set up. One among the many things that need addressing is the need to confirm reliable and good quality component supply – particularly relevant in the electronics industry.
This question can’t be answered thoroughly without a great deal of research, and even then it is has bases that are speculative. Nevertheless, rules of thumb formulae are very powerful. The biggest risk to the success of a project is usually time. As soon as activities get protracted very significant costs start to accrue. For this reason it is of great value to have rules of thumb by which blind alleys can quickly be identified and avoided.
At the EM we recommend working this puzzle out backwards. Instead of trying to work out how much a development will cost: work out what the expected worth of the project (£TotalWorth) will be at the end of the investment period (n) in years and use the discounted cash flow method to estimate the investment required (£Investment). It is necessary to make an approximation with rate of earnings from this, e.g. it might be speculated that 25% annual earnings (r x 100) are expected from the project, but there will be a period when the development will not have any earnings because the product is under development for a period (d – years). The formula for this is below followed by an example. If this exercise is being done against a development function that is only part of the project, say electronics, then the proportion of £Investment that related to electronics will have to be estimated (P).
£Investment = P x £TotalWorth/(1 + r)^(n-d)
Working through an example, let’s assume that we want to own an asset that is worth £2,000,000 in 3 years (n). This is the £TotalWorth and theoretically represents how much money we could turn it into and deposit in the bank in 3 years time if everything is successful. Let us assume that it will take one year to develop (d) to a state that opens the revenue stream, and that the per unit revenue rate (r – is % earnings/100) is 0.25, i.e. 25%. Let us also assume that the exercise relates only to electronics that is only part of the total development, e.g., enclosure and software costs dealt with elsewhere. Let’s also assume the electronics investment (P) is 30% of the entire investment (£Investment). Putting the numbers in gives:
£Investment = 0.3 x £2,000,000/((1 + 0.25)^(3-1)) = £384,000
This means that a budget of £384,000 should be allocated to electronics development.
How long will development take?
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