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Non-recurring engineering (NRE) refers to the one-time cost of researching, developing, designing, and testing a new product. When budgeting for a project, NRE must be considered in order to analyze if a new product will be profitable. Even though a company will pay for NRE on a project only once, NRE can be considerably high and the product will have to sell well enough to produce a return on the initial investment. NRE is unlike production costs, which must be paid continually in order to maintain production of a product.
In a project-type company, large parts (possibly all) of the project represent NRE. In this case the NRE costs are likely be included in the first project's costs. If the company cannot recover these costs, it will have to consider funding part of these from reserves (possibly make a project loss) in the hope that the investment can be recovered from additional profit on future projects.
Example
Imagine that you are running a bicycle company. Company B, a competitor, is selling bicycles of lighter weight than yours. You decided that the best way for your company to compete is to create even lighter bicycles. So you hire some engineers to design lighter bicycles for you. You pay their hourly wages, you pay for the materials they need to build prototypes, and you pay for any equipment they may need to accomplish this task. Eventually they finish the design of the new bicycle. Then, you may need to build new machines to fabricate bicycles according to your new design. After all of that your new bicycle will go into production. The money that you paid for the engineer's wages, the testing equipment, and building the new machines is the NRE because you no longer need to pay those costs now that the bicycle has entered production. Now you have to keep production costs low enough so that you can recover the NRE and profit from the sales of your bicycles that have the new design.
External links
- Non-Recurring Engineering by Daniel Shefer - a short explanation of NRE
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