Outsourcing production removes a lot of operational burden and introduces a specific new problem: you no longer see what your product costs to make. The contract manufacturer quotes a price, that price includes their material purchasing, and unless the arrangement is structured carefully you have no visibility into the largest component of it.

Three Models, Three Cost Positions

Turnkey — the contract manufacturer buys everything and quotes a finished price. Simplest to administer, least transparent. You’re paying their material cost plus their margin on material, and you can’t see either. This is fine for stable low-value products and expensive for anything where material dominates.

Consigned — you buy the material and supply it; they charge for labour and overhead only. You keep purchasing leverage and full visibility, and you carry the inventory and the coordination burden. Usually the right model where material is a large share of cost or where you have better buying power than they do.

Hybrid — you buy the high-value or strategic components and they source the commodity items. This is where most mature arrangements end up, because it puts effort where it pays.

The Visibility Clauses

Whatever the model, negotiate for cost transparency up front. It’s straightforward to agree before the relationship starts and close to impossible to add later.

An open-book structure separating material, labour, overhead, and margin. The right to audit material invoices for major components. Agreement on which price movements pass through and which are absorbed, ideally indexed to a published benchmark. And your approval required for substitutions on specified components.

That last one matters beyond cost. Unauthorised substitution is a quality and traceability issue as much as a commercial one.

Where Costs Escape

Scrap allowances. If the contract builds in a yield allowance and actual yield is better, who keeps the difference? Frequently unspecified, which means they do.

Minimum order quantities on your behalf. They buy in their economic quantities and you may end up paying for stock you’ll never consume when the product changes.

Excess and obsolete material at end of life. Establish liability before launch, not when the product is discontinued and there’s a pile of components with your part numbers on them.

Engineering changes. Every change has a material cost consequence at their end, and without a defined process these arrive as change orders with numbers you can’t verify.

Keeping Your Own View

Maintain your own BOM and your own should-cost model even when you’re not buying the material. Update component prices from market data. It’s the only way to know whether a quoted increase is legitimate, and it takes far less effort than it sounds once the structure exists.

Also keep visibility of their inventory position on your parts. Their stock is your exposure at end of life, and finding out how much exists only at discontinuation is a recurring and expensive surprise.

ticktick.ai maintains BOM and should-cost models for outsourced products, including contract manufacturer stock positions and change cost impacts.