Contract Manufacturing

Most contract manufacturers do not believe that they qualify for the R&D credit because they themselves are not involved in either final component design or because they are responsible only for production, however this is not true. In many cases, contract manufacturers qualify for the research and development tax credit because they are developing repeatable and highly complex production processes where extensive experimentation is required. In addition to the time invested by companies in developing repeatable, high quality production processes, activities like the production of prototypes, first articles, and the validation of these components also qualifies for the credit. With these types of projects, there are also opportunities to qualify raw material and component expenses allowing for businesses to offset the extensive investments they have and will be making in the future.

Qualified Research Activities for Contract Manufacturers

  • Development of production processes based on final part design
  • Evaluation and modification of components to optimize manufacturability
  • Use of CAD software
  • Testing and validation of prototypes and first articles
  • Development and modification of 3D design models
  • Development of automated production cells
  • Development of custom tooling, fixtures, and dies
  • Experimentation to increase product yield and decrease production time
  • Development targeting regulatory changes with regard to production processes or products
  • CNC machine programming
  • Quality assurance and testing protocol development activities
  • Design and development of unique packaging solutions

R&D Case Study: Contract Manufacturing

This company is a contract manufacturer that specializes in the design of highly innovative and customized production processes for medical instruments. Customers bring unique designs that have never been manufactured, and before they are ready to engage the company for their contract manufacturing services, require proof that the company is capable of manufacturing the product. 

R&D Qualification

Medical instruments must comply with specific and very stringent requirements and regulations before they are able to be sold in the US. These instruments are typically very expensive and difficult to manufacture and not many contract manufacturing firms have the capability to manufacture to the high level of quality and standard required. As a result, this company, without ever charging the customer, evaluated the customer’s design, developed their own unique manufacturing processes, tooling, and fixtures, and created sample prototype parts to provide the customer for testing and validation. 

The owner of this company along with members from engineering hypothesized on what the most likely development track would be.  Often times, the company recommended end product design changes to the medical instruments to improve part manufacturability. Brainstorming sessions were conducted to in order to determine feasibility and achieve a basic framework for the manufacturing process.

The project then moved to the detailed design phase. Through the use of SolidWorks, a member of the engineering group developed designs for the tooling, dies, and fixtures, as well as identified any equipment requirements. Engineering also collaborated with personnel in production to perform additional feasibility analyses and further refine the design of the tools and processes.  They performed modeling, simulation, programming, or prototyping techniques as part of this effort.  

Production would then receive the engineering drawings and begin fabricating the first iteration prototypes of the tools, dies, and/or fixtures and prepare the necessary equipment for a trial run. As the trial run was executed, the process was being monitored to identify any potential issues that may affect the quality or functionality of the final product, such as timing, part orientation, temperature, etc. 

For this company, a customer may request anywhere from 50 to several hundred samples.  The company may create anywhere from 2 to 3 times more than requested before the company is able to develop a process that will manufacture a sample that meets or exceeds the customer’s requirements. Once several prototypes are created, a wide range of tests are performed to determine if the prototypes meet quality and performance standards.  Prototypes are subjected to destructive testing, which includes tensile tests and compression tests.  It is common for tests to fail as the fixtures, tooling, dies, and the processes and equipment utilizing those tools are modified. Furthermore, many of these sample prototypes were also destroyed in destructive tests. The design of the tooling, fixtures, dies and the process itself underwent numerous design changes and refinements until technical personnel are able to create a process that is both cost-effective and repeatable and final acceptance testing is passed. 

Results Speak For Themselves

The company has been claiming credits for the past decade and is able to claim total combined federal and state tax credits of nearly $145,000 annually.