Why Does Price Vary Between Contract Manufacturers?

Contract manufacturers use a pricing method called cost plus (for a description of cost plus pricing, click here). This method takes an estimate of costs to build a PCBA and adds an amount for profit.

If you were to quote several contract manufacturers, how much should you expect their prices to vary? The answer is about 5 percent.

Since all contract manufacturing companies use cost plus, variations in the quoted prices are usually due to small and inevitable variations in the cost estimate. If you compare quotes from several CMs, you will usually see prices cluster around a certain level. This level is usually +/- 5 percent from the middle of this cluster. When you see this, be confident you have found the market level for that product. Most CMs realize their prices are based on cost estimates, which are only so accurate and they are therefore more than willing to adjust prices based on guidance from the OEM (click here for a discussion of whether or not OEMs should provide such guidance).

Prices that vary from this market cluster by between 10–20 percent are most likely a reflection that this particular product is not well suited to the capabilities of that particular contract manufacturer, resulting in higher costs. For example, a PCBA with lots of through-hole requirements will be expensive at a CM that does not have automated equipment for through-hole soldering. This price variance can also reflect a CM that is somewhat interested in your business, but not interested enough to put their most competitive foot forward.

Often prices vary by 20 percent or more. Usually this is the result of an error in cost estimation, and the error is probably related to material cost. If a contract manufacturer is 20 percent from the average quote, and you verify the material cost they used is correct, this is a CM that does not want your business (see our article here regarding the best sized CM for your project). 

This post originally appeared on the DigiSource Blog