Every ETO manufacturing business runs into the same five challenges, and Dynamics 365 Finance and Operations (F&O) can solve each one. This guide walks through all five: what each challenge looks like day to day, how F&O handles it, and the setup choices that make the difference.
If you build to customer specifications, you’ve probably lived through most of them. You quote a price before engineering has finished the design. A long-lead part arrives late because nobody ordered it until the drawings were final. A customer change lands after your team has built half the assemblies. Production orders drift away from the job they belong to. And the real margin only shows up months after the job ships. Each of these has a clear fix in F&O, and most of the work is setting it up the right way.
Key Takeaways
- In D365 F&O, ETO work runs through Project management and accounting. Each customer order becomes a project, from estimate to final margin.
- Build the quote on a work breakdown structure. It gives you a baseline to measure the finished job against.
- Buy long-lead parts in stages as the design firms up, and tie each purchase to the project.
- Route every design change through engineering change management. It shows which open orders a change affects before anyone acts.
- Create production orders from the project’s item requirements. Then choose Finished item or Consumed item posting for project costs.
- Recognize revenue as work progresses and compare actuals with the estimate, so you catch margin problems early.
Solving the Five Biggest ETO Manufacturing Challenges in Dynamics 365 F&O
Every ETO business has its own products and quirks. But the same five challenges come up in almost every project we see. Each section below covers what the challenge looks like, how F&O handles it, and the setup choices that matter. Microsoft’s own production process overview sets the frame: engineer-to-order work usually runs through a project that starts with engineering. Production orders then build what the project needs.
Quoting Before the Design Exists
Treat the quote as a commercial baseline, and build it on a structure you can carry straight into the project.
An ETO quote gives the customer a price and a date while engineering is still open. It rests on assumptions about materials, engineering hours, shop labor, outside services and contingency. Trouble starts when those assumptions sit in a spreadsheet nobody opens again. Then there’s nothing to measure the finished job against.
In F&O, a won quote becomes a project with a contract that holds the billing terms. A work breakdown structure (WBS) breaks the job into tasks with estimates. Those estimates become the project’s budget and forecast, as Microsoft’s project management and accounting overview describes. F&O invoices fixed-price projects on a billing schedule from the contract. If your pricing depends on complex technical rules, a CPQ tool can sit in front of F&O. Microsoft also publishes a reference architecture for ETO estimating on Power Platform, with F&O as the system of record.
The most common mistake is skipping the WBS because the design will change anyway. It will, and that’s exactly why you need a baseline. Without one, you can’t tell whether a job lost money because of the quote or because the scope grew.
Buying Before the Design Is Final
Release long-lead purchases in stages as each part of the design firms up, and tie every purchase to the project.
This handoff decides most ETO delivery dates. Wait for engineering to finish, and a 16-week component makes you late. Buy everything at contract signing, and you may pay for parts the final design drops.
F&O handles this through item requirements, which list the materials a project needs. They cover stocked and nonstocked items. You fulfill them from stock, production or purchasing, then consume them against the project. You can create purchase orders from the project, a sales order or an item requirement. Each method charges the project at a different point. Pegged supply lines on a subassembly’s bill of materials generate purchase orders tied to its production order.
The setup choice that matters most is agreeing when part of the design is buyable. Many teams use a released engineering version or a passed readiness check as the trigger for each major subassembly. Without a clear rule, purchasing either waits for permission that never comes or acts on drawings about to change.
Managing Changes After Production Starts
Route every design change through engineering change management, so you see what it affects before anyone acts on it.
In ETO, changes are normal. The customer revises a requirement, a supplier discontinues a part, or the shop finds a problem mid-assembly. Each change can touch open purchase orders, work on the floor, the schedule and the price. When changes travel by email, every team reacts separately, and the project pays for the confusion.
F&O’s engineering change management keeps each product as a versioned engineering product. Each version has its own effective dates, bill of materials, route and documents. Anyone can raise a change request, including straight from a sales order line. An engineering change order then makes the change and lists its business impact. That means the open purchase and production orders the change will affect.
Product readiness checks can block a new version until the right people sign off, and workflows handle approvals. Engineering change management has been on by default since version 10.0.25, so most F&O customers already have it.
Two choices shape how well this works. First, decide which system owns the design. If engineers use CAD or PLM software, define how their approved bill of materials becomes the manufacturing one in F&O. Agree, too, on who controls revisions. Second, handle the commercial side of each customer change. Update the project budget, the forecast and, if the change is billable, the contract price. That way the margin reflects what you’re actually building.
Keeping Production Tied to the Project
Create production orders from the project’s item requirements, so every build stays linked to the job and its costs.
An ETO project often needs several assemblies and subassemblies from your own plant. Production orders created on their own lose their link to the customer job. Their costs then end up somewhere finance has to dig them out of later.
In F&O, a project production order that fulfills a sales order or item requirement stays linked to it. You then choose how costs reach the project:
| Posting method | How costs reach the project | Good fit when |
|---|---|---|
| Finished item | The finished item’s cost posts to the project when production ends, and you can invoice the item to the customer | You bill for the finished equipment and want a clean cost per assembly |
| Consumed item | Raw materials and hours post to the project as separate transactions as production uses them | You want detailed, running visibility of materials and labor on the project |
Production orders without a link to a sales order or item requirement can’t post costs to the project until production ends. That’s one more reason to generate them from the project. Keep the production structure as simple as the control you need. More production orders give more detail, but each one is another order a planner has to manage.
Knowing the Margin Before the Job Ends
Recognize revenue as work progresses and compare costs with the estimate, so you spot margin problems in time.
ETO projects can run for months across several accounting periods. If revenue and margin only appear when the job closes, a problem from month two surfaces in month nine.
In F&O, fixed-price projects can recognize revenue during the project with the completed percentage method. Costs sit in work-in-progress accounts until you recognize the revenue. Because the WBS estimate became the budget, you can compare actual costs against it at any point. Billing schedules tied to the contract let you invoice at agreed milestones, which helps cash flow on long jobs.
The usual mistake is treating project accounting as a finance-only setup after go-live. Design billing rules, revenue recognition and cost categories with operations from the start. They decide which numbers the project manager actually sees.
When Business Central Is Enough for ETO
Smaller ETO shops often run well on Business Central. They use projects for the customer job, production or assembly orders for the build, and add-ons where they need more. Our Business Central manufacturing guide notes that heavy ETO shops sometimes outgrow it and move to F&O. The usual triggers are:
- Frequent engineering changes that need formal change control
- Several sites or legal entities
- Long projects that need revenue recognized across accounting periods
- Supply chains complex enough to need deeper planning
If none of those describe you yet, Business Central can serve an ETO business well for years. Our overview of Dynamics 365 for manufacturing compares the two products in more detail.
Is D365 F&O Right for Your ETO Business?
Dynamics 365 F&O is usually the right choice for ETO manufacturing businesses that have outgrown simpler systems. Typical signs are designs that change often, projects that span accounting periods, several sites or entities, and formal change control. F&O gives you one place to follow a job from first estimate to final margin.
A good way to find out is to trace one recent job from end to end. Look at what you quoted and when you ordered each long-lead part. Then look at every change after design approval, and at the final margin against the estimate. Wherever the trail goes cold, your system needs to do more of the work.
If you’d like help with that review, it’s the starting point of our ERP Complexity & Value Assessment. Folio3 Dynamics has spent more than 20 years implementing Microsoft Dynamics for manufacturers, including engineer-to-order operations. The assessment maps your quote-to-cash and engineering flow and recommends Business Central or F&O. It also scores your data readiness, lists the integrations involved and lays out a phased roadmap. Request an assessment or explore our manufacturing ERP services.
Frequently Asked Questions
Quick answers to common questions about running engineer-to-order manufacturing in D365 F&O.
ETO Basics
Engineer-to-order (ETO) manufacturing means designing and building a product to a customer’s requirements after they place the order. The design, bill of materials and routing aren’t fully known at the start. Engineering, purchasing and production overlap, so each order usually runs as a project.
In make-to-order (MTO) manufacturing, the design already exists and production starts when the order arrives. In ETO, engineering continues after the customer orders. The bill of materials, cost and schedule firm up as the project progresses.
ETO Manufacturing in Dynamics 365 F&O
Yes. Dynamics 365 F&O runs ETO manufacturing through Project management and accounting. Engineering change management controls versioned designs, and item requirements cover project materials. Project production orders handle in-house builds, and project accounting covers billing, revenue and margin. There’s no single ETO setting; you combine these capabilities to fit how your business works.
Yes. Engineering change management is part of Supply Chain Management, and it’s been on by default since version 10.0.25. It covers engineering versions, change requests, change orders with business impact, readiness checks and approval workflows.
With Finished item posting, the finished item’s cost posts to the project when production ends, and you can invoice it. With Consumed item posting, materials and hours post to the project as production uses them. That gives more detailed, running visibility.
Usually not. Project management and accounting inside F&O already covers project-based manufacturing with stocked items and production orders. Dynamics 365 Project Operations adds broader project and resource planning. Integrated deployments need an extra feature turned on before they can use stocked products.
