Contract Manufacturing Pricing: Making Sure You're Charging the Right Amount
- Winning the Contract That Destroyed the Margin
- The Full Cost Build-Up for Contract Manufacturing Jobs
- Actual vs Standard Costing: Which to Use
- How AskBiz Supports Contract Manufacturing Job Costing
- Recovering Uncosted Costs: Tooling, Set-Up, and Engineering
- Before and After: A Singapore Electronics Contract Manufacturer
- Price Escalation Clauses: Protecting Against Material Cost Increases
- Quote Right, Win Right
Contract manufacturers live or die on costing accuracy. Quote too high and you lose the order. Quote too low and you win a job that erodes your margin. Precise job costing — covering materials, labour, machine time, overhead, and yield loss — is the only way to price confidently.
- Winning the Contract That Destroyed the Margin
- The Full Cost Build-Up for Contract Manufacturing Jobs
- Actual vs Standard Costing: Which to Use
- How AskBiz Supports Contract Manufacturing Job Costing
- Recovering Uncosted Costs: Tooling, Set-Up, and Engineering
Winning the Contract That Destroyed the Margin#
A West Midlands contract plastics moulding firm tendered for a new customer's component at £0.47 per piece — competitive, they thought, and sufficient to cover costs. They won the contract, producing 80,000 pieces per month. Three months in, the owner sat down to understand why profitability had not improved despite the new volume. The true cost per piece, when he properly allocated machine time, set-up amortisation, and overhead recovery, was £0.51. He had been losing £0.04 per piece, or £3,200 per month, on a job he had been pleased to win. The error was in his costing model: he had estimated machine cycle time at 22 seconds per piece but actual cycle time was averaging 27 seconds due to longer-than-expected cooling requirements. That 5-second difference, multiplied by 80,000 pieces, was 111 machine hours per month priced at zero. At his loaded machine rate of £34 per hour, that was £3,774 of uncosted machine time — which explained the £3,200 monthly shortfall almost exactly.
The Full Cost Build-Up for Contract Manufacturing Jobs#
Accurate contract manufacturing costing requires capturing five cost categories without exception. First, direct materials: every component and raw material in your BOM, at current purchase price, including yield loss allowance. Second, direct labour: actual operator time per piece, at loaded labour rate (wages + employer NIC/CPF + benefits). Third, machine time: actual cycle time per piece multiplied by loaded machine rate (depreciation + maintenance + energy + tooling amortisation). Fourth, setup and changeover: total setup time for the job amortised across the expected production run volume — shorter runs have higher cost-per-piece setup cost. Fifth, overhead recovery: your factory overhead (rent, utilities, indirect labour, insurance) allocated to each job based on a rate per machine hour or labour hour. Missing or underestimating any of these five categories creates the pricing errors that silently destroy contract manufacturing margin.
Actual vs Standard Costing: Which to Use#
Standard costing uses predetermined rates for labour, materials, and overhead — set at the start of a period and held constant. It is simple to apply but creates risk when actuals diverge from standards. Actual costing uses real data from each job — what was actually consumed, how long it actually took, what was actually paid. For contract manufacturers with diverse job mixes and variable run lengths, actual costing provides more accurate per-job visibility but requires more discipline to capture the data. The practical approach for SMB contract manufacturers is a hybrid: use standard rates for labour and overhead (updated quarterly or annually) but use actual materials consumption and actual cycle time from production records. This gives you near-actual accuracy while keeping data collection manageable. AskBiz supports this model by recording actual batch inputs and outputs and applying your configured standard overhead rates for reporting.
How AskBiz Supports Contract Manufacturing Job Costing#
AskBiz production batch tracking captures actual materials issued to each job and finished goods produced, giving you yield-adjusted actual material cost per piece. Labour time is logged against batches, giving you actual operator hours and cost per job. When synced to Xero, job costs post against revenue by customer and job code, so you can run a job-by-job profitability report at any point — not just at month end when the information is too old to act on. For contract manufacturers quoting new work, AskBiz historical data provides actual cost per piece on previous similar jobs, so quotes are grounded in real production experience rather than theoretical estimates. Over time, this data builds a costing database — the institutional knowledge of what each type of work actually costs to produce — that is your most valuable competitive asset as a contract manufacturer.
Recovering Uncosted Costs: Tooling, Set-Up, and Engineering#
Many SMB contract manufacturers systematically fail to recover three categories of legitimate cost. Tooling: if you invest in tooling or jigs for a customer's specific job, that cost should be amortised across the production volume. A £3,000 tool expected to produce 150,000 parts adds £0.02 per piece to true cost — cost that many manufacturers absorb rather than build into pricing. Setup: if a job requires an unusually long setup due to complexity, that time should either be charged separately or amortised into the piece price based on a realistic run quantity. Engineering and development: if you spend time on DFM (design for manufacture) review, process development, or first-article inspection for a new customer component, that engineering labour has a cost that must be recovered somewhere in the contract. Reviewing your last 12 months of contracts and identifying whether these three categories were properly recovered will reveal a pattern of underpricing that can be corrected in future quotes.
Before and After: A Singapore Electronics Contract Manufacturer#
A Singapore PCB assembly and box-build contract manufacturer was quoting jobs based on a simple cost model: BOM materials + direct labour at SGD 28 per hour + a 15% margin. Machine time, setup, and engineering were not explicitly costed. After implementing job cost tracking in AskBiz and analysing three months of actual versus quoted costs, they found that their true average margin across all jobs was 6.3%, not the 15% they were targeting. The gap was almost entirely explained by unrecovered setup time (averaging 3.2 hours per job, largely uncharged) and unrecovered SMT machine time (which ran at SGD 45 per hour loaded cost but was embedded in the materials line rather than explicitly charged). Rebuilding their quoting model to include machine time as an explicit line item and adding a setup fee for new jobs increased their average quoted margin to 14.2%. They lost 3 of their 22 active customers who went to cheaper competitors — and profitability improved materially despite the volume loss.
Price Escalation Clauses: Protecting Against Material Cost Increases#
Contract manufacturers quoting long-term supply agreements face an additional risk: material cost increases between quote date and production. A job quoted in January at a material cost assuming copper at £7.50/kg becomes loss-making if copper rises to £9.20/kg by the time production runs in October. Standard practice in professional contract manufacturing is to include a material price escalation clause: if raw material costs increase by more than X% from quote date, the piece price is adjusted accordingly. This is not aggressive — it is standard commercial practice. If your current contracts do not include escalation clauses, you are carrying all raw material price risk on your customer's behalf with no compensation. Review your standard terms and add a clause for material cost movements above a defined threshold.
Quote Right, Win Right#
The contract manufacturer who wins every tender is not successful — they are underpricing. The goal is to win the right jobs at prices that deliver sustainable margin. That requires knowing your true cost per job, having the confidence to quote it, and being willing to lose work that does not cover your costs. Building that cost knowledge takes a system: AskBiz for job cost capture, Xero for financial reconciliation, and a consistent review process to compare quoted versus actual cost on every completed job. Within six months, your quoting accuracy will improve dramatically and your margin will follow. AskBiz tracks your production costs in real time. Try free at askbiz.co
People also ask
How do I cost a contract manufacturing job accurately?
Accurate contract manufacturing costing requires capturing five cost categories without exception. First, direct materials: every component and raw material in your BOM, at current purchase price, including yield loss allowance.
What costs should be included in contract manufacturing pricing?
Standard costing uses predetermined rates for labour, materials, and overhead — set at the start of a period and held constant. It is simple to apply but creates risk when actuals diverge from standards.
How do I recover tooling costs in contract manufacturing quotes?
AskBiz production batch tracking captures actual materials issued to each job and finished goods produced, giving you yield-adjusted actual material cost per piece. Labour time is logged against batches, giving you actual operator hours and cost per job.
What is the difference between standard costing and actual costing?
Many SMB contract manufacturers systematically fail to recover three categories of legitimate cost. Tooling: if you invest in tooling or jigs for a customer's specific job, that cost should be amortised across the production volume.
How do I protect my contract manufacturing margin against material price increases?
A Singapore PCB assembly and box-build contract manufacturer was quoting jobs based on a simple cost model: BOM materials + direct labour at SGD 28 per hour + a 15% margin. Machine time, setup, and engineering were not explicitly costed.
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