Engineering Cost Breakdown: In-house vs Outsourced Mechanical Design for Small Manufacturers For small-to-medium enterprises (SMEs) focused on product innovation, deciding whether to outsource mechanical design or hire internally plays a vital role in profitability and speed to market. The common belief that “in-house control” is cheaper often hides the true costs of having internal engineering teams. This analysis offers a detailed comparison of engineering costs, providing a framework to evaluate the real costs of outsourcing mechanical engineering against the fixed and hidden expenses of internal staffing. This comparison is important because specialized engineering services can lead to substantial cost savings, often allowing small manufacturers to reduce their overall product development expenses by 40 to 60% while accessing top-notch expertise. Understanding this engineering cost breakdown for product design is the first step in optimizing your SME engineering budget.
The Real Cost of In-House Engineering Teams When manufacturers compare in-house and outsourced engineering team cost, they often only consider employee salaries. However, the costs of hiring a mechanical engineer go beyond their pay check, creating a significant and often underappreciated financial obligation. The total expenses—fixed no matter the workload—can drain small business resources.
Decoding the Hiring Cost of a Mechanical Engineer
To fully understand the commitment involved in hiring internally, one must consider the entire compensation package. Let’s break down the costs of hiring a mechanical engineer in the U.S. as a typical example:-
Base Salary: A mid-level mechanical design engineer in the U.S. usually earns between $75,000 and $100,000 annually. This is the minimum fixed expense. (Source: BLS Mechanical Engineer Salary Data, SBA Payroll Tax Guide)
Payroll Taxes and Benefits: Employers must cover FICA, state, and federal taxes, unemployment insurance, and worker’s compensation. Additionally, offering competitive benefits (like health, dental, 401k match, paid time off, and sick leave) typically adds another 30% to 45% on top of the base salary. Example: For a $90,000 base salary, the real cost of an in-house engineering team, including benefits, jumps to about $117,000 to $130,500, even before considering overhead. This sharply contrasts with a project-based engineering salary versus outsourcing, where you pay only for completed work.
The True Cost: Overhead and Hidden Expenses One of the most overlooked parts of the engineering cost comparison is the overhead related to the engineering team. These costs exist whether your engineer is actively working on a product or waiting for the next project phase:-
Software and Tooling: Accessing professional-grade tools is essential. Annual license fees for advanced CAD/CAE software (like SolidWorks, Fusion 360, or specialized analysis tools) can range from $5,000 to $20,000 per seat per year.
Physical Infrastructure:
Costs for office space, dedicated desks, high-performance workstations, utilities, and IT support add significantly to fixed expenses.
Training and Development: To maintain skills, mandatory training, conferences, and certifications can add several thousand dollars each year. (Guidelines: WIPO IP Guide, USPTO IP Policy)
Recruitment and Turnover: The cost of recruiting a specialized engineer—including agency fees, interview time, and onboarding—represents a major, non-recoverable expense.
Capacity Constraints and Inflexibility The in-house model is often rigid. When demand spikes, the team can become overloaded, leading to delays. When demand drops, which is common in cyclical product development phases, manufacturers still pay 100% of the engineer’s salary and overhead costs. This fixed-cost model lacks the flexibility small manufacturers need to stay competitive.
Analysing the Mechanical Engineering Outsourcing Cost The main benefit of outsourcing mechanical design is turning a large fixed cost into a precise, variable project expense. Small manufacturers pay only for the specific expertise and hours they require, making the engineering cost comparison tilt heavily in favour of outsourcing for non-continuous or specialized work.
Flexible Models for Outsourced Mechanical Design
Outsourcing provides various engagement models, offering significant flexibility for the SME engineering budget:-
Project-Based (Fixed Price): This model works best for well-defined deliverables (like designing a specific enclosure or optimizing a single part). The manufacturer gets a fixed engineering cost breakdown upfront, preventing budget overruns.
Time & Materials (Hourly): This model suits ongoing development, troubleshooting, or tasks with an undefined scope. It directly connects to mechanical design hourly rates.
Retainer Model: This option offers dedicated capacity at a better rate. The retainer model is ideal for manufacturers with predictable yet intermittent monthly engineering needs.
Calculating the Outsourced CAD Design Cost and CAD/CAE Cost Per Hour External firms typically use a transparent pricing structure based on specific deliverables or hourly rates:-
Hourly Rates: While a U.S.-based consulting firm may charge $120 to $200 per hour, this rate includes software licenses, overhead, and benefits. Clients do not pay for employee downtime or training.
Global Sourcing (Offshore):
Hiring an offshore engineering team can significantly lower rates, sometimes down to $40 to $80 per hour, depending on the specialization and location. This reduction can greatly decrease the outsourced CAD design cost for high-volume modelling work. (Industry data: Statista Outsourcing Data)
Focus on Output: Unlike internal engineers, whose costs accrue regardless of output, external teams charge based on completing milestones. The effective CAD/CAE cost per hour becomes a performance metric rather than a fixed expense. This analysis shows that the outsourcing cost model protects the SME engineering budget from the steep fixed commitment of $148,000 for a single internal engineer.
Scenario Analysis: Project-Based Needs Consider a small manufacturer needing 500 hours of product development work over the year for two new products.
In-House Cost: $148,000 (The manufacturer still pays 100% of the salary for the full year, even though the engineer is utilized only about 25% of the time, leading to wasted capital).
Outsourced Cost: 500 hours * $80/hour (Offshore) = $40,000.
Conclusion: This scenario demonstrates a significant engineering outsourcing savings of $108,000. For firms looking to outsource mechanical engineering for small projects, the flexibility is invaluable.
A Comprehensive Engineering Cost Comparison: In-House vs Outsourced Engineering To truly illustrate the difference between in-house vs outsourced engineering, we must look beyond the simplified figures and compare the total financial obligation for a small manufacturer.
Cost Component
In-House Mid-Level Engineer (Fixed)
Outsourced Engineering Team (Variable)
Base Salary/Fee
$90,000
Variable (Paid per project/hour)
Benefits & Payroll Taxes
$35,000 (Approx. 39% of salary)
$0 (Handled by the vendor)
CAD/CAE Software
$8,000/year (Fixed license fee)
$0 (Included in mechanical design hourly rates)
Office Space & IT
$10,000/year (Dedicated desk, equipment)
$0 (Handled by the vendor)
Recruitment/Training
$5,000 (Amortized yearly)
$0
Total Fixed Annual Cost (Excluding Downtime)
$148,000
Varies based on workload
Quantifying the Engineering Outsourcing Cost Savings The 40 to 60% savings often cited for mechanical engineering outsourcing are real. They stem from cutting out the large overhead linked with personnel. Key areas of savings with offshore engineering include:-
Elimination of Non-Productive Time: You don’t pay for vacation, sick days, administrative tasks, or low design activity periods. Every billed hour is dedicated design work. ● Access to Specialized Skills: If your product requires FEA (Finite Element Analysis) one month and advanced DFM (Design for
Manufacturing) the next, the outsourced team covers immediate access to these specialists without needing to hire engineers for each area. ● Lower Labor Costs: Using an offshore engineering team gives small manufacturers access to highly skilled labour markets where conditions lead to lower mechanical design hourly rates while ensuring quality. This ability to pay only for peak capacity without incurring fixed costs drives significant savings. Manufacturers often find that the mechanical design outsourcing model allows for the most efficient use of capital.
Real Case Study: Automotive Cost Reduction with Outsourced Engineering ENGON Technologies recently partnered with a U.S./European automotive manufacturer looking to reduce product development costs while improving design efficiency. By transitioning to a hybrid outsourcing model, the company achieved: ● 38% cost reduction in CAD/CAE engineering hours ● 3X faster engineering output using parallel task execution ● Full compliance with automotive design standards (Guidelines: WIPO IP Guide, USPTO IP Policy) ● Zero delays despite aggressive launch timelines Learn more in the full case study:
https://engontechnologies.com/engon-automotive-cost-reduction/
Practical Considerations for Mechanical Design Outsourcing While the financial side strongly favours outsourcing, quality and control are also important factors. Successful product development outsourcing requires careful planning:-
Quality and Expertise When assessing the costs of an outsourced engineering team, prioritize experience and proven success.
Portfolio and Case Studies: Examine the firm’s experience with projects similar to yours.
Process Documentation: Ensure they have solid procedures for quality control and iteration management to guarantee expertise in their deliverables.
Intellectual Property (IP) Protection (Guidelines: WIPO IP Guide, USPTO IP Policy) IP security is crucial. When outsourcing mechanical design, always establish a strong Non-Disclosure Agreement (NDA) and include an IP assignment clause. The contract should clearly state that all design work, code, and models are your company’s property.
Communication and Collaboration Communication can be a primary challenge with offshore teams. When calculating overall engineering outsourcing savings, consider the need for clear communication protocols, including:Dedicated Project Manager: Having a single point of contact simplifies interactions.
Time Zone Strategy: Scheduling key meetings during overlapping working hours reduces delays, optimizing the use of outsourced CAD design services. Clear Tools: Using shared platforms for model management and version control (like cloud-based PDM/PLM systems) ensures seamless integration with your processes.
Conclusion The traditional belief that internal engineering guarantees control and cost-effectiveness is outdated, especially for SMEs. A detailed engineering cost breakdown for product design reveals the heavy financial burden associated with in-house engineering teams, including significant overhead and wasted capacity. In contrast, the flexible and scalable nature of mechanical engineering outsourcing—using models like the retainer model and global talent—allows small manufacturers to pay only for the expertise they need, precisely when they need it. This shift from high fixed costs to variable spending establishes the foundation for the anticipated savings in engineering outsourcing. For small manufacturers, the decision to outsource mechanical design is less about losing control and more about gaining financial flexibility and accessing skilled engineering teams at a fraction of the cost of internal hires.
