Non-Recurring Engineering (NRE) is a one time engineering effort by a vendor that is paid for by a customer. What it is, and what it isn't.
Non-Recurring Engineering (NRE) is a one time engineering effort by a vendor that is paid for by a customer. NRE is driven by a feature or capability that a product lacks and a customer wants enough to pay for.
The fundamental issue that NRE highlights is that the demand for it is triggered because the product doesn’t provide the customer with enough value out of the box.
Non-Recurring Engineering is generally requested by customers under the following circumstances:
“The good news about NREs is that when customers spend money on NRE
NRE is not a good way to finance core functionality. It should also not be used as a device to stuff things into a product that are not in the vendor’s best interests in the first place.
NRE isn’t a replacement for professional services either. Customization and integration, especially 'one offs' are the domain of professional services, not development. The product architecture needs to support this and there need to be the resources and skill set to pull this off.
NRE is not a way to craft a product strategy. It should not be allowed to drive decisions that are not in the ISVs long-term best interests. If something doesn’t make sense to be a part of the product, NRE shouldn't get it there. If the customer simply demands that it be done, hand them over to professional services or a custom development shop.
The bottom line is that NRE work should not be done for the core product or, on the other hand for something that is not in the path of the company’s strategic direction.
Now that you’ve decided to embark an NRE project, how do you calculate how much to charge the customer?
In theory, costing an NRE project is easy. Estimate the engineering hours and overhead costs, add a 'fudge' factor for uncertainties and risks and multiply it by your grossed cost rate. The result should then be multiplied by a factor of 5 or so. This is assuming that your company spends 20% of its revenue on R&D.
It is critical to understand the reason for this “5” factor, especially when the NRE takes up a significant portion of engineering’s resources. If engineering costs are around 20% of revenue, an NRE project costing X would have a 5x negative impact on sales. This is because the resources used for the NRE were diverted from producing sale-generating products. This indirect cost must be taken into consideration and not doing so runs the risk of embarking on revenue generating but money losing projects.
A company that is in good financial condition, i.e. not under financial duress, can follow this procedure for costing an NRE projects but a company is on the brink will probably not be able to achieve these premiums.
Support and maintenance costs needs to be priced as well. If the NRE is not incorporated into the product and is available only to the customer who paid for it, support is extra. These costs should be more than the going rate to compensate for the added difficulty of supporting code which is basically a one off. This is because each maintenance release becomes an NRE project in itself.