How Much Research and Development Costs: A Guide by ProCoders
11 min.

R and D (research and development) is crucial for many businesses, including enterprises and corporations. It gives new products and increases market leadership. However, some leaders wonder how they can access affordable R&D solutions. This is especially important for startups and SMBs with a priority towards survival and growth.

The first thing to clarify here is that R&D isn’t a cost, they are investment. This is a point that many business leaders miss.

Indeed, research and development expenses are growth investments that can help you edge out your competition.

Introduction to Research and Development Costs

Research and development (R&D) expenses are a crucial aspect of a company’s operations, as they enable businesses to stay ahead of the competition and drive revenue growth. R&D costs can be significant, and companies must carefully consider how to account for these expenses.

In general, R&D expenses are considered operating expenses and are recorded on the income statement. However, some R&D costs may be capitalized and reported on the balance sheet if they meet certain criteria, such as having an alternative future use or being related to the development of a new product or process.

What is R&D?

R&D (Research and Development) is the process businesses use to create new products or improve existing ones. It helps companies solve problems and find better ways to work. Additionally, many R&D activities can qualify for tax credits if they meet the criteria for qualified research as defined by the IRS.

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R&D is important for long-term success. It allows businesses to grow, adapt, and stay ahead of competitors. Companies can run R&D with their own employees, but many choose to outsource it. Working with outside experts can bring fresh ideas and speed up innovation.

R&D’s Role in Future Profits

The purpose of investing in R&D is to increase the company’s long-term profits. The business can:

  • improve its existing products
  • develop new ones
  • create new markets for them

It can also reduce the costs of manufacturing and marketing, for example, e-commerce app development cost. This can increase profit margins.

What role R&D should play in a company’s strategy? This depends on the business goals of each individual company. Many rely on R&D for more than just product research. These companies hire dedicated team or use their R&D departments for:

  • market research
  • strategic R&D budget planning
  • sales and marketing assistance

R&D Examples

Companies are constantly researching new ways to improve their product line or develop new products that consumers will buy. Many have their own labs with staff devoted to researching and developing new items. However, some companies hire outside researchers to conduct this work.

In some cases, companies may fund research performed by external organizations, which can have specific financial and accounting implications.

Here are some research and development examples to make sure you fully understand what it is and how it’s done:

  • Intel invests heavily in R&D to create new ways of manufacturing chips efficiently. In 2021, the company spent over US$15 billion on research and development.
  • Apple spends a lot on R&D for new products like the iPhone, iPad, Apple Watch, and Apple TV. According to reports, US$19 billion was allocated by Apple for R&D.

Google spends a lot on R&D, particularly for its search engine. In 2023, Google’s parent company, Alphabet, spent over US$45.4 billion on R&D.

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  • Amazon invests heavily in R&D to promote innovation across a wide range of business activities. This includes retail, cloud computing, digital media, and e-commerce services. Reports say Amazon spent almost US$42 billion on R&D in 2020.

International Treatment of R&D

It is important to consider the tax implications of foreign research, as these costs may need to be amortized over a longer period compared to domestic R&D expenses.

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R&D costs: expenses or investments?

As we have identified, R&D costs should rightly be identified as investments. They impact the growth of your business, after all! They aren’t expenses that make businesses lose money. (If done right, of course.) Successful businesses innovate their products and find opportunities to boost revenue through R&D.

In some cases, R&D expenses can be treated as a capitalized cost if they lead to the creation of a new asset with future economic benefits.

Successful businesses innovate their product lines and find opportunities to boost revenue through R&D.

Research and Development Expense: Tax Credit

The R&D Tax Credit, also known in the USA as the Research and Experimentation (R&E) tax credit, is a federal benefit that provides companies dollar-for-dollar cash savings for performing activities related to the development, design, or significant improvement of products, processes, formulas, or software.

To claim the R&D tax credit, companies must ensure that their activities meet the criteria for qualified research expenses as defined by the IRS.

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

  • Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
  • Create a dollar-for-dollar reduction in your federal and state income tax liability
  • Increase earnings-per-share
  • Reduce your effective tax rate
  • Improve cash flow
  • Carry forward the credit up to 20 years
  • Perform look-back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
  • Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies).

So if you want to invest in R&D and reduce costs at the same time, please check out the financial law in your country for more information about R&D tax credit cost.

Tax Credit

Income Statement and R&D Expenses

In understanding research and dev, we have to learn that the income statement is a critical financial statement that reports a company’s revenues and expenses over a specific period. R&D expenses are typically included in the op expenses section.

Companies must carefully track and record their R&D expenses to ensure accurate financial reporting. The income statement provides stakeholders with insight into a company’s financial performance and helps them make informed decisions. R&D expenses can be a significant portion of a company’s operating expenses, and understanding these costs is essential for analyzing a company’s financial health.

How Much Does R&D Cost?

Research activities are directed toward the creation or identification of new products or services. This is the point where you stop counting the costs and start counting the profits. The costs incurred during R&D activities can vary widely depending on the scope and objectives of the project. So, when we turn our focus from costs to Return on R&D investment, we start moving to the business blue ocean, full of opportunities, blind niches, and new profits.

Indeed, the costs, including R&D expenses for IT staff augmentation services can vary according to various company needs (just like the cost to hire an app developer, for example). Therefore, it is impossible to quote a specific sum without considering the peculiar objectives and goals of various companies.

Research and Development Cost Examples: Arrangements

Some companies partner with universities or other organizations to conduct research. In these cases, the company funding the R&D often covers part of the project’s costs. This approach provides research for businesses and experiences for universities.

Accurately documenting the services performed during these research arrangements is crucial for compliance with accounting standards.

Capitalized Costs

Sometimes, a company benefits more by capitalizing R&D expenses instead of deducting them. If R&D leads to a new asset, like new technology, it is recorded as an asset rather than an expense. R&D costs that lead to the creation of intangible assets with alternative future use can be capitalized and recorded on the balance sheet. This approach spreads costs over time, matching expenses with future revenues. Capitalization can also improve financial statements by reducing immediate losses and showing higher profits in the short term. However, companies must follow accounting rules to determine which R&D costs qualify for capitalization.

Software R&D Expenditure

Research and development spending covers all software-related costs for creating or improving products. This is especially important for companies focused on software development, as R&D helps them stay competitive and bring new solutions to the market. Developing a new process for software development can significantly enhance a company’s competitive edge and operational efficiency. These costs may include coding, testing, and refining software to meet user needs.

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Incurred Costs and Expenses

Incurred costs and expenses refer to the costs that a company has incurred in a specific period, regardless of when the related payment is made. R&D expenses are typically incurred costs, as they are related to the development of new products or processes. Companies must carefully track their incurred costs to ensure accurate financial reporting.

The matching principle requires that companies match their expenses with the related revenues, and incurred costs help achieve this matching. R&D expenses can be significant, and companies must carefully consider how to account for these costs to ensure accurate financial reporting.

Bloomberg Tax and R&D

Bloomberg Tax is a leading provider of tax research and analysis, and its expertise can be invaluable for companies navigating the complex world of R&D tax credits. The R&D tax credit is a valuable incentive for companies that invest heavily in research and development, as it can help offset the costs of these activities.

Bloomberg Tax provides companies with the guidance and support they need to claim the R&D tax credit and maximize their tax savings. By understanding the R&D tax credit and how to claim it, companies can reduce their tax liability and increase their cash flow.

Eligible Expenses

Eligible expenses for the R&D tax credit include a wide range of costs related to R&D activities, such as software development, cloud infrastructure, and research conducted by employees. Companies must carefully track and document their eligible expenses to ensure they can claim the R&D tax credit. The R&D tax credit is subject to certain limitations and requirements, and companies must ensure they meet these requirements to claim the credit.

By understanding the eligible expenses and requirements for the R&D tax credit, companies can maximize their tax savings and reduce their tax liability. Additionally, companies can use tools like Mosaic to track and monitor their R&D expenses and ensure they are driving increases in revenue.

Reducing Research Cost: How to Save on R&D and Get More Profits?

Note that R&D costs may not yield profit immediately. They may do so after 1, 3, or even 5 years. However, you can still gain regular benefits in terms of tax credits. (Although this depends on the country’s tax laws in which a business is resident.)

In addition to direct R&D expenses, companies must also consider other costs such as market research and product testing.

In any case, to gain more profits from R&D a business must be as fast as possible with:

  • research
  • development
  • testing
  • launching

Also, they must be able to work with the location and cost model, as the points are expanded below:

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Innovative R&D Cost Management – Nearshore R&D

How much does research cost? And how can SMEs reduce it? The high cost of R&D in in-house projects has caused the nearshore approach to become not only a cost-effective option but also a powerful tool for companies that seek to be agile, fast, and efficient in their R&D efforts. This approach is an increasingly attractive one for companies that want to advance their technology at a faster pace and realize greater R&D efficiencies.

Companies must also assess the financial risk associated with R&D funding arrangements to ensure proper financial reporting.

Best practices from TOP giants

Estonia, which is located in the Central part of Europe, has been a center for scientific research for a long time. The area is home to world-class universities.

Collaborative R&D arrangements often involve joint efforts to develop and commercialize new products, where the ownership and rights associated with intellectual property become critical factors.

Estonia has already become a leading country in IT outsourcing. It has a developed infrastructure, a highly qualified workforce, and low rates for office spaces.

Estonia has become a popular place for international companies to set up their R&D offices.

Fujitsu Estonia: Fujitsu’s team in Tallinn is working on new features for the platform and testing them with users. Fujitsu’s goal is to expand its technology and service vision by creating people-centered solutions.

Microsoft Development Center Estonia: Microsoft’s research office in Estonia is one of the company’s most ambitious and remote projects. The reason why Microsoft chose Estonia as the location for its R&D centers is the great talent pool of local engineers with experience working at other top IT companies.

Twilio R & D Center Estonia was opened in 2015 in Tallinn, the capital of Estonia. The value proposition of the institute is quite simple. Twilio established the center to support its operations and help the company adapt to its fast-growing customer base.

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Software R&D Service from ProCoders for Successful Business

To know how much research and development costs in software development, perhaps the phase that ProCoders takes most seriously is the discovery phase. This is where adequate research must be conducted to determine the precise needs of the project and set appropriate plans. The research phase involves assessing market opportunities, costs, and production timelines before moving on to the development phase. It has always been a guiding principle in all our projects, although two come to mind now.

When Roth River contacted us for IoT development, our in-depth research enabled us to determine the company’s exact problems and how to best design an app solution fit for the company and its customers. Because of this, our expert developers were able to cut development time by 25% by introducing new flexibility to the team.

Similarly, in building the fitness app Dryft, our team conducted detailed research to understand the scope of the work and determine the best tools and approaches to creating a solution. The discovery phase was 4 weeks of extensive surveys after assembling a vetted team in days. The result was accelerating time-to-market by 30% despite the complex requirements.

FAQ
How much does R&D cost?

Typically, it ranges from 3% to 20% of total revenue. But good R&D expense ratio varies by industry. High-tech and pharmaceutical companies often spend more on R&D than other industries.

How to estimate research and development costs?

Assess project scope, required resources, timeframes, labor costs, materials, and overhead expenses. Consider historical data and industry benchmarks for more accurate estimates.

What is a good R&D expense ratio?

Typically, it ranges from 3% to 20% of total revenue. But good R&D expense ratio varies by industry. High-tech and pharmaceutical companies often spend more on R&D than other industries.

What is the budget of R&D?

The R&D budget is the allocated financial plan for research and development activities within a company. It includes expenses for personnel, equipment, materials, and other resources needed to conduct R&D projects.

How do you calculate R&D expense?

Calculate R&D expense by summing up all costs associated with R&D activities. The list should include salaries, equipment, materials, outsourced research, and overhead costs directly related to the development process.

How much of revenue should be spent on R&D?

Generally, high-tech and pharmaceutical companies might spend between 10% to 20% of their revenue on R&D. Other industries might allocate 3% to 5%. The percentage of revenue spent on R&D can vary greatly by industry.

What is R&D cost capitalization?

R&D cost capitalization involves recording certain R&D expenditures as assets on the balance sheet rather than expensing them immediately. This practice is subject to specific accounting standards and regulations.

What is R&D cost breakdown? 

R&D cost structure refers to the detailed categorization of expenses involved in research and development activities. This typically includes costs for salaries and wages, materials and supplies, and equipment and technology. Outsourced services and overhead expenses such as utilities and facility maintenance can also be included.

Who pays for R&D?

R&D costs are typically paid for by the company conducting the research. However, funding can also come from government grants, private investors, or partnerships with other organizations.

How much should R&D cost?

The cost of R&D should align with the company’s strategic goals, industry standards, and financial capacity. There is no one-size-fits-all answer. It depends on the desired outcomes and available resources.

What are some R&D costs?

R&D costs include salaries of researchers and developers and materials and equipment costs. The list goes on with expenses for external research services, software and technology tools, and overhead costs like utilities and facility maintenance.

Is research and development expensive?

Research and development can be expensive. If your industry requires testing, specialized equipment, and highly skilled personnel, expect to spend a lot. However, the potential for innovation and competitive advantage often justifies the investment.

Conclusion: Key Takeaways

Research and development expenses are growth investments that can help you edge out your competition. R&D is a planned investigation directed at uncovering new knowledge that can lead to advancements in products, services, or techniques. The purpose of an R&D department is to push the boundaries of existing technology and create breakthroughs.

So, how can you improve your company’s R&D strategy and reduce R&D costs? You can start by outsourcing. ProCoders has gained experience working with clients from various industries. We helped supercharge their software development projects by elevating R&D through the discovery phase. To see how we can be of help, contact our stellar team today.

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