# An Illustrated Example of an Incremental Payment Structure

A Payment Structure For Hardware Development And Production That is Fair And Works For Both Parties

Using the example of a \$1 mil USD contract for 20K units of an Android Custom Phone we are going to illustrate what a fair and incremental payment structure looks like.

We've made it simple, very visual and clear for you to understand at a glance how this structure works.

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# Quoted price per unit

The price per device includes the sum of its costs and depends on the quantity ordered

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# Ordered quantity

The quantity is determined by the customer based on his sales forecast

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# Amount of the contract

The contract value will be the unit cost multiplied by the quantity ordered. (Development costs are amortized into the unit cost)

The contract is paid as and when development progresses.There are payments of several deposits at different stages of the project. Each milestone corresponds to the achievement of one of the steps of the Custom Android Phone development and production in compliance with the agreed deadlines.

#### DEPOSIT #1

Following the acceptance of the contract deposit #1 triggers the prototype development.

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# Value of the first deposit

Calculation: Contract Amount x Deposit Level = \$1 mil x 10% = \$100 K

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# Total paid by the client

Calculation: At this point only one deposit has been paid

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# Remaining amount to be paid

Calculation: Amount of the contract minus the first deposit = \$1 mil - \$100 K = \$900 K

#### DEPOSIT #2

Following the production of the first prototype, deposit #2 triggers its delivery for feedback and modification requests from the client.

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# Value of the second deposit

Calculation: Contract Amount x Deposit Level = \$1 mil x 10% = \$100 K

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# Total paid by the client

Calculation: Sum of the deposits = \$100 K + \$100 K = \$200 K

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# Remaining amount to be paid

Calculation: Amount of the contract minus the sum of the deposits made = \$1 mil - \$200 K = \$800 K

#### DEPOSIT #3

After validation of the prototype a third deposit triggers the production of the mold.

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# Value of the third deposit

Calculation: Contract Amount x Deposit Level = \$1 mil x 10% = \$100 K

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# Total paid by the client

Calculation: Sum of the deposits = \$200 K + \$100K = \$300 K

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# Remaining amount to be paid

Calculation: Amount of the contract minus the sum of the deposits made = \$1 mil - \$300 K = \$700 K

#### DEPOSIT #4

After validating the mold and testing it in hand made working sample it's time for trial mass production. The fourth deposit triggers the trial and final mass production.

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# Value of the fourth deposit

Calculation: Contract Amount x Deposit Level = \$1 mil x 30% = \$300 K

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# Total paid by the client

Calculation: Sum of the deposits = \$300 K + \$300 K = \$600 K

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# Remaining amount to be paid

Calculation: Amount of the contract minus the sum of the deposits made = \$1 mil - \$600 K = \$400 K

#### BALANCE PAYMENT

When mass production is complete the payment of the balance triggers the delivery of the Custom Android Phones.

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# Value of the first deposit

Calculation: Contract Amount x Deposit Level = \$1 mil x 40% = \$400 K

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# Total paid by the client

Calculation: Sum of the deposits = \$600 K + \$400 K = \$1 mil

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# Remaining amount to be paid

Calculation: Amount of the contract minus the sum of the deposits made = \$1 mil - \$1 mil = \$0

At this point the contract has been honoured incrementally by the customer with the payment of \$1 mil in five deposits. The manufacturer has produced and sent the Custom Phones to their destination.

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Hatch | Smart Manufacturing

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+86 755 8368 9256

info@hatchmfg.com